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Guest Post: Central Banks Create Deflation, Not Inflation
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Financial and risk bubbles don't pop in a vacuum--all the phantom collateral constructed with mal-invested free money for financiers will also implode.
If there's one absolute truism we hear again and again, it's that central banks are desperately trying to create inflation. Perversely, their easy-money policies actually generation the exact opposite: deflation.
I will leave the debate as to what constitutes deflation to my economic betters. My definition of deflation is simple: deflation is any increase in the purchasing power of nominal wages.
By nominal I mean unadjusted: $1 is simply $1. It is not seasonally adjusted or adjusted for inflation/deflation or anything else.
When your paycheck loses purchasing power--that is, it buys fewer goods and services-- that's inflation. When your paycheck gains in purchasing power--it buys more goods and services, even though you didn't get a raise--that's deflation in my terminology.
I find that purchasing power cuts through a lot of economic jargon and data-clutter: how much does your paycheck buy today, compared to last month or last year?
Since the economy is dynamic, purchasing power is constantly increasing or decreasing on a variety of goods and services. This bedevils any attempt to discern systemic inflation/deflation.
The Federal Reserve and other central banks desperately want inflation, even though it destroys the purchasing power of paychecks and savings, for one reason:in a system based on phantom collateral supporting ever-increasing mountains of debt, the Prime Directive of central banks is to make it ever easier to service yesterday's debt.
The only systemic way to make it easier to service existing debt is to inflate the nominal value of money by debasing the currency. The net result of inflated money is a debt of $100 stays $100, but the face value of newly issued money keeps rising.
If a person earns $10 an hour, it will take 10 hours to earn the money to pay off the $100 debt. But if central banks debase the money so that it takes $20/hour to buy the same goods and services that were once bought with $10/hour, then it only takes 5 hours to earn enough money to pay off the $100 debt.
The fact that the owner of the debt will suffer a 50% decline in the purchasing power of the $100 is of no concern to the central banks, as long as the decline is gradual enough that the hapless owner of the $100 doesn't notice the loss of purchasing power. Hence the central banks' favored inflation target of 2%, which destroys over 20% of the purchasing power of money every decade, but does so so gradually that everyone being robbed is not motivated to protest their impoverishment.
So now we understand why central banks are desperate for inflation: it's the only way to keep the Ponzi scheme of ever-expanding debt from collapsing in an era of stagnant wages. Since the vast majority of people aren't increasing their income, inflation is the only way to enable them to keep servicing their debts.
Unfortunately for the central banks, thanks to the rise of software, robotics and global wage arbitrage, wages are not rising along with prices. As a result, everyone who depends on earned income is getting poorer.
Japan is the leading example of this dynamic. Despite the Bank of Japan's failure to ignite 2% inflation, they've succeeded in undermining their currency (the yen) sufficiently to cause the purchasing power of wages in Japan to fall a catastrophic 9% in the past few years.
Everyone who depends on earned income, i.e. the bottom 95%, all get progressively poorer in inflation. Meanwhile, technology is deflationary, as the costs of producing anything digital decline to near-zero, and progressively cheaper software and robotics replace costly human labor and all the horrendously expensive labor overhead of healthcare, etc.
Central banks might want to ponder Woody Allen's famous quip, If you want to make God laugh, tell him about your plans, for the actual real-world result of central banks easing, money pumping and zero interest rates is deflation.
As my colleague Lee Adler explains, central bank easing and zero-interest rate policy (ZIRP) fuel over-capacity which leads to declining prices: deflation with a capital D. The current oil glut is a primary example of this dynamic: Why Oil Is Finally Declining, Which Could Lead to Disaster(Wall Street Examiner)
The central banks have been frustrated in their insane and misguided aim to increase inflation because QE and ZIRP actually foster the opposite of what central bankers expect. Central bankers and conomists think that to get inflation they only need to print more money, not recognizing that the inflation that does result from money printing, asset inflation, leads eventually to consumer goods deflation. ZIRP and QE cause malinvestment and overinvestment that leads to excess productive capacity.That leads to overproduction and oversupply. Oversupply puts downward pressure on prices. That spurs a vicious cycle where the central banks print more money to try to create inflation. That puts more cash into the accounts of the leveraged speculating community and off we go again.While ZIRP and QE encourage waves of excess speculation and malinvestment, they do so at the expense of investment in labor. Businesses become speculators in their own stocks and products rather than in costly and uncertain investments in labor. The value of labor falls in the marketplace. Mass wage and salary incomes fall. Consumption falls. Demand trends weaken, putting downward pressure on the prices of consumption goods.That causes a vicious cycle in business where executives perpetually look for ways to shrink costs, exacerbating the economic decline of middle class working people. The "middle class" can increasingly no longer afford to buy the products of those who employ them. Thus we get the spectacle of things like WalMart holding charity food drives to benefit its workers, who are not paid enough money to feed their families.The oil price experience is a perfect illustration of what happens when central banks promote over speculation in commodities and commodity production. A boom built on virtually free and unlimited financing becomes a ticking time bomb when the value of the collateral collapses.
Thank you, Lee. A collapse in the value of collateral is precisely what's happening as the value of oil has fallen by 40% in the past few months.
The retail sector is another poster child of the deflationary consequences of central bank-driven mal-investment. The astonishing expansion of retail space in the U.S. since the 2008 meltdown is increasingly divergent from the reality that sales and profits of bricks-and-mortar stores and chains are under siege from online retailers.
The market value of retail space is set to implode from the over-expansion of commercial real estate, which was entirely driven by the Fed's cheap-money policies that destroyed low-risk returns on cash and savings.
Central banks have driven investors into increasingly risky bets as investors seek some sort of return. The bubble is not just in stocks, bonds, and other assets--most importantly, it is in risk.
Doug Nolan explains why the systemic risk created by central bank policies is ultimately deflationary-- The Unavoidable Peril of Financial Sphere Bubbles:
"Virtually unlimited cheap finance on a global basis has over recent years certainly spurred unprecedented capital investment. And, importantly, ongoing technological innovation and the “digital age” have played a momentous role in creating essentially limitless supplies of smart phones, tablets, computers, digital downloads, media and 'technology' more generally. Throw in the growth in myriad 'services', including healthcare, and we have economic structures unlike anything in the past."
In other words, this time it is truly different, but not in the way the conventional happy-story narrative would have it, i.e. financial-risk bubbles can keep expanding forever.
Financial and risk bubbles don't pop in a vacuum--all the phantom collateral constructed with mal-invested free money for financiers will also implode.
So go ahead, central bankers: tell God about your plans to generate inflation.
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The best way to combat a "credit crisis" is to ease lending standards, lower rates, and issue more credit.
Or so I'm told, but I don't have a PhD in witchcraft. Otherwise I might question why the definition of a stable currency is one that is constantly devalued by inflation targeting.
Your insult to witches did not go unnoticed...
I can't believe this guy is on ZH, he needs to go back and reread Economics in One Lesson. Inflation is defined as the expansion of the currency supply.
When your paycheck loses purchasing power--that is, it buys fewer goods and services-- that's inflation.
And you still believe that what is printed in that ECON textbook of yours has any correlation to the present?
Wow! Merry Christmas! Start drinking NOW.
Economics in One Lesson is not a textbook.
And yes, it fully applies to today.
"Economics in One Lesson" - Very good book by Henry Hazlitt. This is the book that made the "broken window fallacy" famous.
The free pdf version (legal) is here:
http://mises.org/library/economics-one-lesson
This is not the fake, Keynesian, economics crap.
After All these post crisis years, nobody can yet agree: are central banks creating inflation or deflation?
Well here's another hint for you all:
It's both!
And every single day is now proving me righter and righter.
Inflation: in cost of necessities for living, business and homeownership
Deflation: in real incomes, net worth, employment/advancemt and the value of any Credit agreement.
Net net: erosion in the buying power of fiat, but also in the buying power of human endeavor, weather work or creativity
What, QE leads to ED*?
Yes, after the MOARgasm.
* Erectile Dysfunction.
"[The] abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holdings illegal, as was done in the case of gold.... The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.... [This] is the shabby secret of the welfare statist's tirades against gold. Deficit spending is simply a scheme for the 'hidden' confiscation of wealth." Alan Greenspan (1966)
We deflated some folks
It just isn't getting old, not sure why though.
Speaking of deflating some folks, I'm not worried about deflation, inflation, stagflation, or hyperinflation. What I'm worried most about is depopulation. I'm prepared to survive any financial disaster, but preparedness has its limitations.
If everybody had a national income and private debt contracts were declared null and void deflation would be a good thing.
However we live within a debt money system , under such circumstances deflation = theft.
Bailouts are theft. That's not the Fed but Congress insofar as the USA is concerned. And yes...BAILOUTS are MASSIVELY deflationary.
A "BLACK HOLE" as it were.
Okay then why can't any company/person with good credit access billions at 0.1%!!!!
What fucking garbage. let me be clear, deflation is a fucking myth so long as the population is growing and all those folks are still competing for the remaining resources.
Correct, but if lending standards are eased and credit becomes abundant, as it has over the last decade, the result is over purchasing and bringing future demand forward. By lowering lending standards and strapping the populace with debt, future purchasing power is diminished, so a certain amount of retail is affected. He calls that "deflation", which may or many not be the correct term. But without question, easing lending standards causes the consumer to 'buy now' at the expense of future retail growth, as we are witnessing now.
Yes, "deflation" in anything not essential to your survival.
Let prices deflate for Christ's sake, they are way out of line with wages anyway.
Fucking Duh.
I am deflated and can't get up
Because only the "politically connected" can do so - by design. Some animals are more equal than others and all that.
Where is population growing? Certainly not at the same rate in all plaecs. Ex-immigration, I think the US is flat to declining. Europe has the same dynamic. SE Asia is growing like gang busters.
I used to expect inflation, maybe even hyper-inflation, but increasingly I think it is just going to collapse into a miserable heap. There are going to be all these old people (in the US) holding worthless assets.
That is when we find out the true colors of these various demographic groups we hear about so much ...
Regards,
Cooter
" I think the US is flat to declining. Europe has the same dynamic.'
Like the dollar, the western world is becoming less relevant every day. I'd argue that certain populations in America are in fact still growing. Whether or not they are an asset is something else all together. I'd argue that they sure as hell will not be supporting all those old white folks, if that's what you are suggesting. They are simply not going to have good jobs, the Asians certain will however.
It has always been a global market, period. people around the world need to be mindful of what the real value is that they bring to the market for their relative wage. I think that the corporate eleites would like nothing better that a global market where everyone works for chinese wages.
Unfortunately for everyone, the earth does have a real carrying capacity, so I expect lots of "unforeseen" events moving forward as that which cannot be sustained, won't be. Be optimistic, this means there will be oportunites to innovate (or die).
I expect to do both. Innovate AND die. Because on a long enough time line....
well said. decline, though, can be a long road to travel
God says; "Maybe it's time to clear the deck for some more Dinosaurs"
...in a system based on phantom collateral supporting ever-increasing mountains of debt, the Prime Directive of central banks is to make it ever easier to service yesterday's debt.
That ^ presumes they care about servicing that debt to begin with. Yellen and most of the people on the FOMC will be long dead before the full consequences of that debt are felt. Insert rat-in-cage analogies here.
Precisely. Some people/corporations can still access billions at 0.01% (ZIRP).
This is in fact a global "let the majority eat cake" monetary experiment.
Sounds like you'd better get on and stay on those big ZIRP ships, or build your own ship, boat or dinghy.
exactly
been saying for years
QE/ZIRP is disinflationary
deflationary when asset bubbles burst (we're at onset)
LOL!!! The asset bubble will be allowed to "burst" when less than one entity is actually holding said asset.
Give me a break. So long as the human population is growing and all those people are still competing for the remaining resources and a better quality of life, deflation will remain a fucking myth.
no, i'm serious
think of cash flow as blood to economy. There ain't any ... just miniscule returns everywhere ... current returns predicated on greater fool theory (someone to pay you more for what you have than what you paid for it) ... it will end like always ... badly
" ... it will end like always ... badly" yes, precisely because that "cash" or "money" will die. That will not change the fact that people will still need certain commodities to simply survive (hence demand will persist).
you are right that money will "die"
leaving the money that survived with greater purchasing power
(lower prices)
not if that money is no longer accepted by your trade partners. Good luck with that cognitive dissonance. Perhaps die means something different in your world.
I imagine a neofeudal town where a craftsman or innkeeper has something for sale at a high price... maybe he only gets one sale a month for summer months... so mostly it is only rich noblemen that can purchase... and likely with precious metal... and likely in poor times there is only a trickle of money flow... and best to serve the needs of the wealthy clients... or you will only be bartering with chickens and produce.
Now that is just imaginary.
Could this be the case in a modern country like the USA with 300 million people spread from coast to coast, some in the mountains or rural country, some in urban areas?
I believe the scenario still works... but urban people look different that rural folks.
Urban people will see more building, construction, work on power plants, work on roads & bridges... more money will flow, but the money is still scarce since their are few sources of the money.
I can't imagine deflation it turns out...just people that downsize, live without, live with debt, live communally, and maybe are debt slaves.
"Money" is largely irrelevant.
Let me say this one more time. You will not build or do shit without consumable calories, period.
There simply is no solution to resource or energy scarcity.
Yes, we agree on that and most everything else.
I was just trying to use my brain in a different way. Not sure if my writing and communicating skills are adequate here. But some people use creative parts of the brain, some use logic, some learn by reading, some use interactive models.
Today we have low Velocity which I over looked above. If things get much worse with money hoarded by few that means fewer decision makers are spending it. We still have Federal Government & Banks creating money... eventually banks will invest in actual capital equipment and factories... but may not be in my life time and may employ labor at 1950s levels of $1 dollar an hour.
Pendulum swings back and forth.
Maybe in 30 years all water, electric, oil, gasoline will be considered utilities or government owned Industries... in that environment with $1 per hour labor... we would all live like the:
CHINESE. In one room apartments typically with no property ownership.
But Low Velocity turning into .25 Velocity... I'd hate to guess what that looks like, multiple generations living in 900 Sq FT Homes maybe.
Friend, I think you need to differentiate between levels of Demand for different regions.
The NYC/LA level of Demand ("I want, I want, I fucking Demand!"), and... Basic survival level of demand for most of the planet.
Sounds like most of the planet may expect to do slightly better, while we in the West (and NYC/LA) can expect to do a lot worse -- even if the overall global demand is either constant or increases slightly due to earth's population growth.
I don't know. Folks out west can be pretty innovative. Moreover, there is certainly a lot of cannon fodder in L.A. county.
Combine the two and just start taking what you want/demand.
When scarcity rears it's ugly head, this may be the only option you have.
Door-to-door bond and repo salesmen would fix everything. Maybe some steak knife futures and vaccum futures for sale too.
The US Department of Insider Trading.
https://www.youtube.com/watch?v=-DT7bX-B1Mg
This would be a perfect day to have a 9-11 whistle blower come foward...a trifecta if you will :)
So I'm right to not scan and bag my own groceries for zero discount.
If only there were a full service station I could pull into and tip the nice man.
But i thought CBs created hyperinflation??
Now they are creating deflation?
Deflationary collapses generally come before the hyperinflation event. That is and with deflation, the collateral supporting the debt/loans deflates creating severe stress on the value of the loan. Given the leverage present in the financial industry such as banks, insurance companies, shadow lenders, etc. (from 10x upward), it only takes a small reduction in the value of the collateral to wipe-out any equity in the finance companies thus they either fail, look to raise more capital from the market (which would be extremely expensive) or more than likely, look to get bailed out again.
But here is where the hyperinflation event would most likely take hold. As the economy tanks again, not only would bailouts require large amounts of capital from the government (thus pushing the deficit higher), the tax or revenue base would shrink and quite possibly, violently. So now the government is faced with a perfect storm of having to bailout insolvent finance companies, deal with lower tax revenues, and on top of that, increase outlays for everything from food stamps to unemployment. The budget deficit would skyrocket again and eventually, investors would question the worth of the US Debt and its currency (i.e., the USD). If this happens, a debt crisis would lead to a currency crisis and hyperinflation would take hold.
Hyperinflation is almost always associated with a currency event or collapse based in the loss of faith in the currency. So by creating a deflationary environment, the CBs are setting the ground work for a hyperinflationary event if and when the faith in currency is lost. This is why all eyes are on Japan as the Yen and the JGBs are most likely the first to fail.
+1
Bravo!
Please post more often
Precisely. "Prices" become irrelevant when no one wants your fiat in exchange for their labor or a commodity/good in their possession.
and let us not forget, when the central bank buys those failing loans and debt instruments they use cash. It is this increase in cash that gives us the wheel barrows.
Yes deflation can do the initial scare, the central banks will take it from there.
Both yourself and LawsofPhys echo this notion of a sudden loss in faith in the currency/debt backing it. I feel like that point has long passed, that every country knows every other country is practically bankrupt. Does anyone really think the US can make good on it's 18 trillion? Yet the dollar goes on and so does the rest of the world. Untill there is an alternative, I don't see it as this hard 'no faith tomorrow so hyperinflation'. Thus I don't see monetary policy nearly as rigid as many here purport.
"the dollar goes on for now" -- fixed.
I suggest you take a look at what has been going on with the reverse REPOs.
The Fed is in fact trying to remove "liquidity" as fast as they can. Gee, I wonder why?
The Fed giveth and the Fed taketh away...
Maby both hyperinflation in the financial economy, and hyperdeflation in the real economy?
colm mccarthy:
December 5th, 2014 at 2:45 pm
"The examples routinely employed in the media are €300,000 or €400,000 houses. In addition to Greg’s point, it is essential to understand that these figures are Dublin figures. €400,000 buys a mansion in most parts of provincial Ireland. €100,000 is enough to buy a decent small semi-d or country cottage in many areas. Anyone who cannot afford a €20,000 deposit in these areas is hardly a viable credit risk.
There is enough empty space around Dublin, the lowest-density urban area in Europe in its size band, to build another city. Opposition to the CB’s proposals is fuelled by an unspoken resistance to facing this issue."
Inflation is the increase in the money supply.
ZIRP/QE isn't deflationary.
What has occurred is malinvestment which then unwinds causing a credit crunch - deflation as the money supply contracts.
All this is market manipulation which creates bubbles that then collapse back to where the market should have been in the first place.
So inflation causes bubbles-bubbles create price rises-prices rises are unsustainable-bubble pops-prices fall-money contracts(deflation).
you got it mostly right
but
credit/debt = money
and, yes, i know that is not the textbook definition
you got it mostly wrong
gold/silver=money
ha ha
it's a fiat world, baby
Cash in bank will be more and more like loyalty points as things fall apart. Hard to use. Blackout dates. Expiration dates. Devaluation. I'm thinking to fill my garage full of decent whiskey instead.
My Definition of Inflation is anything which is expanding and can be measured in dollar terms. This works better for Main Street as opposed to Government Definitions & Government statistics...
- Federal Employee Compensation Expand most years, as do their Bonus money, and these tend not to ever contract
- Federal Contracting is expanding, so we should be able to quantity this in terms of number of contracts and total dollars spend
- Federal Budget Outlays Inflate each year, except at the end of a War
- US Social Programs are Inflating
- US Household Debt is Inflating
- TBTF Derivatives are Inflating
- Financial Schemes, Financial Instrument Types are Inflating as greater complexity shields the fraudulent Accounting
- Malinvestment & Casino Type Gambling by TBTF Banks are Inflating
- Private Executives, Public Executives, Sports Players Compensation is expanding/inflating... we have never seen a contraction unless it was in the Great Depression era
- Government Taxes, Fees don't seem to contract
Some kinds of Inflation can further be Labeled "Looting" of Corporations, taxpayers, or the Currency.
What?
"The only systemic way to make it easier to service existing debt is to inflate the nominal value of money by debasing the currency. The net result of inflated money is a debt of $100 stays $100, but the face value of newly issued money keeps rising."
I've read that paragraph a half-dozen times and no matter how I parse it, it's wrong- In fact, it's the opposite of true.
What were you trying to say? I know you know better.
This is merely the prelude to the next big scam, the globalist SDR, backed by a global basket of assets, including the used toilet paper known as $100 bills, plus US mortgage certificates.
Actually, being fascinated with hyper-inflation since my teens, and having studied most, "printing" produces both price inflation and depressions.
As the people, the victims, spend more time on trying to maintain their purchasing power, and businesses inadvertently consume capital, a depression ultimately sets in.
In any case, "printing" is theft.
An American, not US subject.
"Save the planet, guillotine a bankster."
Is it a Crime that TBTF Banks are no longer linked to US Household Savings... or should it be... is there moral hazard here?
If we have a Fascist Banking System, one that only serves big businesses...hm... They have a Monopoly to create money at something like 1:40 Assets to Creation... But if we can show US Households, US Small Businesses, US Wages & Compensation, US GDP (Real not Fake), and even Large Businesses are contracting... Could we get the MSM, force them to respond.
I mean this week we saw how EPS really haven't been growing... isn't that the last piece of evidence we need to prove a Depression & Broken Economy only held aloft by Federal Social Programs???
"My definition of deflation is simple: deflation is any increase in the purchasing power of nominal wages."
Charles, how old are you? I'm guessing young, since you apparently save nothing, spending your whole paycheck week to week. Where do capitalists get the source of funds they need to create businesses and jobs? The fed? Ever hear of savings? Wait till retirement and your non-inflation has eliminated a huge portion of your 401k.
Chuck is a leftist whose discovered he can appeal to libertarians by crying about the fed. That doesn't mean he understands anything about economics.
ever heard of fractional reserve banking?
savings for investment (mostly) myth
credit($$s) created out of thin air by banks
right, but that doesn't create real wealth. It only takes money from others and hands it to people who may or may not have proven themselves as wealth creators. Money is not real wealth when it comes down to it.
Charles is always selling himself as the answer to these questions, so I assume he's talking about real wealth, not pieces of paper. (actually, I've never seen him propose any real solutions. He just likes to point out problems).
The thoughts of colm- he wants to create anther slum the size of Dublin in you guessed it Dublin.........
Main Stream Media is going to run a shame of consumer not spending more money psychology campaign. Example, Be happier: Spend more money to help the economy grow routine. Fuck them!
The force of the shame campaign is limited. The 'racism' variant needs more shame to keep the producers feeling guilty while subsidizing the boom in non-productive population and benefits, leaving less shame for the 'buy more shit' department.
the socialists/marxists have evolved from the gulags.
no surprise that this is happening on barry's watch
fuck off and die barry you nasty pig
The banking plan . It seems is to push us out of the market towns and into the Dublin slum............these bastards achieve this goal using tax, inflation / deflation captured rents to natural utilities and laws such as peat cutting bans which cause a loss of redundancy for common folk,
In the long game, rock always beats paper.
so central banks crreat deflation .. ie purchasing power lol
thats why the dollar of yester day is worth a penny
That is Max Keiser's claim. He has claimed this for a long time, the central banks are driving deflation by their actions. Of course most call him Mad Max, so there you are. Tell the truth, expose the big media liars, and they call you Mad. Nothing new there.
from trav7777
''deflation destroys leveraged players.
The USG is the most leveraged. Therefore, deflation is an existential threat to them. Nevermind every bank, also leveraged, and all the big boyz, leveraged too. All the FIRE economy depends upon the inflation wave and they have the levers of power.
Deflation helps people with money in mattresses. I can't see their interests prevailing.
Deflation or inflation, the FRN is still a debtmoney-based instrument. So long as the future seems to hold contraction, its "worth" is in peril. The FRN's very existence is at odds with reality right now. I would not expect paper based on debt to come out of this with real worth because there simply is now no way to pay the interest.
IOW, we have to go to pure fiat at some point; our economy simply cannot back a production-based currency because we don't have the production. We cannot back it with debt or a promise to produce/pay more in the future because the future doesn't hold more, it holds less.''
http://www.zerohedge.com/article/guest-post-stretch-farthest-point-known...
One more big drop, the excuse to go all zimbabwe.
Take advantage.
Inflation is really a increase in efficiency / profits.
However there comes a point where you approach toward a catastrophic decline in redundancy.......
A example of this in Ireland.
A single house on a bog . It has enough peat fuel for all home heating needs , not very efficient but extremely redundant & also home heating utilities cannot make any money pot of you.
Build a city the size of Dublin however.......
The local and even national hinterland cannot supply it with enough fuel.
It must import oil , gas and coal from vast distances..........
Extremely efficient in burning stuff but not redundant.
I am not a historian or an Economist, but I have a question regarding this subject.
I often see Spain & UK as not having enough Manufacturing since like 1945 onward. In other words banks & Capitalist may have purposefully or inadvertently not developed Industry.
And normally many of us think manufacturing is where you get the best multiplier effect and money velocity. The USA having topped out manufacturing employment in 1979... we are in a similar state now (low Manufacturing & High Dependence on Foreign Trade Goods). Fascist typically would like to control trade, use cheap foreign labor, control foreign labor, suppress foreign labor, and suppress domestic labor rates... perhaps by not industrializing fully.
Question: Is it possible in the USA that we saw Inflation from the 1970s from not enough consumer goods in addition to going off the gold standard, and having an Oil Embargo & Energy Crisis????
Spain much like Ireland was chiefly agrarian up until the late 1950s
Galacia had some coal based industry and that's about
it.
http://marcdefaoite.blogspot.ie/2012/11/the-sase-apparition-through-aban...
Thanks.
this man is literally the worst article author i have ever seen run anywhere, i am absolutely exhausted with ZH running these, and i am flabberghasted to see the peanut gallery of comments actually consider any of this worthy of debate, especially with a title like that.
central banks are a vehicle for the inflation of the money supply, period. wild and unpredictable asset price changes follow, but they do not follow any predictable increase or decrease, save that of the death of the money good through hyperinflation. they are a consequence of bad market signals misdirecting capital investment, which can vary both in number and in size.
please jettison this charlatan post-haste and never link his blog again. thanks.
and if you are offering any life advice on the way out, here is a tip: never listen to max kaiser or any of the other greenbackers, ever again.
4 yrs and 3 weeks.........and you just made ur 3rd comment........
asset deflation only occurs when there is a liquidity crunch. conceivably, under a gold standard, deflation can't exist as value is relative to the weight of the gold and the weight never changes. the same is true for inflation.
under the fiat money scheme inflation and deflation are neccessary for the smooth functioning of the system. the argument between inflation and deflation is moot. they are, in the most destructive form, both sides of the same coin. that is what we are discussing here. in the weimar republic and in the latest example in zimbabwe as the worst cases with argentina and venezuela as more of the usual event.
fiat money schemes have always ended in or endured printapalooza events as printing free money becomes too big a temptation. the result is inflation. since wages move slower than inflation more of the paycheck is used for essentials making nonessentials cheaper for lack of demand. that is what .gov calls deflation.in the midst of inflation we have deflation.
deflation of asset prices is another matter. eventually the inabilty of the consumer to consume creates a liquidity crisis that ends in the deflation of asset values(ex equities?). is it really deflation, though? in relative terms? if the value of my 100 dollar property goes down 90% and your ten dollar property does the same, is there deflation in real value or just an adjustment of nominal value? as with all liquidity crises, the people in debt get crushed and the people with cash pick up what has to be left behind for pennies on the dollar. who has the cash? why the conductor of the orchestra, the banks.
What if gold is valued by the market and not declared by a government? Gold would then compete with currencies as a store of value.
It does not work now because the gold price is determined in a paper market. If the market were physical only it could compete very well. Two thirds of the world has a population that believes this already. All that is left is for the paper market to fail.
''What if silver is valued by the market and not declared by a government? Silver would then compete with currencies as a store of value.''
silver to $55,000/oz
i think it will ultimately be the shaghai gold market that determines currency value as a sort of fractional reserve system based upon gold(and other commodities) where gold is the guarantor of account deficits and the level of debt issuance(money printing) determines currency value vis a vis the new commodity standard. in other words, nations would have to show their gold physically.
The paper market conspiracy doesn't hold water. Futures and other derivatives can only impact the timing of gold settlements and almost all derivatives have a physical delivery component that can be arbitraged to the physical market. Gold isn't at $1200 because of a central bank cabal, it's because the sheeple that think paper currency has intrinsic value, that government is competent, and that centrally-planned economies may actually work.
Most people have been so acclimated to inflation that they still can not grasp the concept of deflation. Nor the certainty of it.
QE is billions. Credit markets are trillions.
Everything got pretty cheap in 2008, and will again, soon.
This is Inflation:
Feds Plan for 35 Agencies to Collect, Share Electronic Health Info...
Job health insurance costs rising faster than wages...
I get the premise. Our working poor are fat (overcapacity), we throw out half our food, and our donated clothes are mostly sold to for $50 per truckload to third world nations. You can buy a second hand iPad for under $100.
To expand this out though, what happens when there is massive default? Government handouts are already more lucrative than working for most people due to this imbalance of deflationary private sector wages and inflationary COLA. What happens then? Do the working classes just totally decouple their system from that of those in power? Or do they try to cut us while keeping themselves solvant until revolution occurs?
Ghost armies at the end of the Roman Empire...Charles is becoming one of my favorite writers on here...
No one will be cut if you bring a knife to a gunfight.
(downie not from me)
Vaguely appropriate considering today - Dammit Janet! - https://www.youtube.com/watch?v=ZbpJb7hjb7M
CHS is right about one thing: the cheap money created by the Fed has resulted in massive oversupply of everything, from houses to canned goods, to IPods, Ipads, I-everythings.
Why is China collapsing? The world has had enough of their cheap shit. There's tons of cheap shit everywhere. Try farming in a rural community (currently being contemplated by me). Roadside stands sell tomatoes three for a dollar. Corn, four ears for a buck. Now, if more and more people in the rural communities start canning, storing and conserving, it won't make any sense to plant anything... for a while, until everybody runs out of food. That's when you'll have inflation, after a massive deflation and depression, and we're headed for the abyss in rapid fashion.
The actions of the Fed and other central banks have only caused asset inflation (mostly stocks, but to some extent, housing, especially on the high end, and luxury goods). Nobody is starving in America, but that's what they'd like. They aren't going to get their way. Americans are proving to be a lot smarter than the Ph.D. assholes at the Fed.
A greater depression is coming. Brace for it. Hold gold, silver, cash, productive machinery, tools, hard goods, water, food, guns and ammo.
Lee Adler and Charles Hugh Smith are smarter guys than I, but I'm not sure what they are saying.
As my colleague Lee Adler explains, central bank easing and zero-interest rate policy (ZIRP) fuel over-capacity which leads to declining prices: deflation with a capital D. The current oil glut is a primary example of this dynamic: Why Oil Is Finally Declining, Which Could Lead to Disaster(Wall Street Examiner)
- Downward Sticky Prices
- Downward Sticky Wages
Oil Supply has been high since 2008, Production has been up over that period as well. Makes me think the Price oil & gasonline has been manipulated since 2008.
But okay if we suspend disbelief and accept that oil supply is now high and price have come down... what do we mean by over capacity? Fruit & Produce, Consumer Goods from overseas.
- We are a Trading Empire like the British Raj
- We have little Manufacturing
- We provide Services
- So are we going to build too many restaurants, hotels and retail stores?
- Perhaps Financing of Fraking Wells will halt and not be rescued by the Federal Government?
- Federal Government will Repair too much Infrastructure, Highways, Bridges, Dams, Hydroelectric Power Plants?
- The Police State will Collapse along with the NSA Corporate Network?
No, we are over supplying cheap labor by having open borders, outsourcing, off shoring, and decapitalizing manufacturing.
" Businesses become speculators in their own stocks and products rather than in costly and uncertain investments in labor. The value of labor falls in the marketplace. Mass wage and salary incomes fall. Consumption falls. Demand trends weaken, putting downward pressure on the prices of consumption goods."
The value of Labor is falling, but it is due to lack of development in Businesses, and Racketeering to Drive down the Cost of Labor in the USA... Plus Monopoly control of creation of credit & Money by Private Banks which tend not to take chances on new businesses and don't work to liberalize rules, regulations, fees, and obstructions to small businesses (like Free Trade Agreements, NAFTA, CAFTA-DR, WTO, UNESCO, UN)
“Central banks are desperately trying to create inflation. Perversely, their easy-money policies actually generate the exact opposite: deflation.”
One way or the other, we are dealing with a policy that guarantees the utter destruction of the dollar, and a few dozen other currencies.
And, if you want to survive the destruction, you don’t want to be the last 90% to read the article What Price Gold… $7,000…, and act accordingly.
dup
Do you limit your analysis to M1, M2, M3 regarding Inflation? I would guess not.
Most money is Electronic, but we also have to consider Assets & Property... Today this wealth is not chasing Gold or Precious Metals. The reason appears to be Greed and Interest in expanding Wealth through either labor or Investments.
Your link it to long for me to read right now. Given a collapse in Credit, in Markets, in confidence in currency, in World War...
Why would gold go to $7000 an oz ?
I go well beyond M1-3. I examine all “cash equivalents” that are directly or indirectly collateralized by US Treasuries, which means I also examine counterparties: those obligated to perform relative to the investment or monetary instrument in question. You see, currency and bank reserves used to be collateralized (backed) by gold; no more. Now they are collateralized by US Treasuries.
“Your link is too long for me to read right now.”
As I’ve noted, don’t be among the last 90% to read it; and with any one of your collapses, it will be too late.
“Why would gold go to $7,000?” Follow this link.
In reading this article and its comments, the over takeaway seems to be:
1. Use less, far less and save way more (cash, PM and real assets).
2. Live modestly and prudently. Hedge like crazy.
3. Try to create multiple streams of income, to counter the risk of one stream drying up or being unsteady.
The rest is now too complex and too damn manipulated to make any kind of sure-fire plans or schemes. Note that this is exactly why most cultures live in (or are forced to live in) communes, to pool their assets, skills and income streams.
Long multi-generational homes and family compounds. The odds get even better when several or numerous families or compounds cooperate or unite for mutual benefit, to develop a small private network. Aka Co-Op or Village.
Most wisely said. It is always with gratitude that I read comments who offer suggestions to the problems exposed.
Such definition of inflation/deflation serve only to obscure reality of ripping off billions gullible people who believe in financial economics as science. What we dealing with, is not laws of nature but as Adam Smith said, deliberate, precise policy of oligarchic elites disguised as fiscal, monetary, economic, financial strategy in order to deal with meddlesome spectators i.e. people who work for living.
Also we will not be able to comprehend anything if we do not realize that we have here in US and in the world, bifurcated economic and state system, you know, two Americas, with different economies and laws exactly like in medieval times. In First America, you steel billion you get a medal and golf round with president, in the other, Second America you steal yogurt for your hungry, sick child or sell cigarettes for living, you loose you freedom and become incarcerated slave or if you lucky you get choked to death.
The inflation/deflation is a process and not state. And, in sacrosanct “free” market, to which these terms suppose to refer to, the only invisible hand groping you is hand of First America oligarchs steeling from our pockets, while satisfying their sexual perversion with impunity.
The cruel myth peddled by oligarchs is supply/demand “law” what a BS. The balance between supply/demand is rare and unreachable in real economy, and if “artificially” achieved, is solely a result of market power of individual market players supported by propaganda of so called price discovery and not natural law of society.
Weak buyer, is always extorted, to pay demanded high price, by strong seller, regardless of exchange value of the widget.
Strong buyer extorts weak seller to pay demanded, low price regardless of exchange value of the widget.
Who is strong and who is weak market player? That’s the result of deliberate policy of ruling elites and in no way a virtue of participating individuals or organizations.
In order to even begin to talk about inflation we need to ask: inflation/deflation of what? Relative to what? Expressed how? In whose interest or benefit? And at what market, run by whom?
See below two examples:
if increase of nominal prices is smaller then increase of nominal wages/benefits/disposable income. Is it inflation or deflation in real terms? The nominal prices rise but we still have deflation since purchasing power of people increases. Is this bad for people their Second America economy?
If decrease of nominal prices is smaller that decrease in nominal wages/benefits/disposable income. Is it inflation or deflation in real terms? We have inflation since purchasing power of people decreased. Is this good for people and their Second America economy?
Yes, we can have “real term” inflation while nominal price levels decrease that’s what is causing confusion among First America economists trying to put veil over our eyes and ignore consequences of their own doing.
Therefore, considering nominal value of purchasing power of individual and not real purchasing power of 99%, is strait wrong, uninformative play of words and only confuses issue.
Printing money does not cause inflation nor raising interest rates (withdrawing money from the system) does not cause deflation in second America if the money are never used in main street transactions but only within financial world of illusion (First America) where scribble on a piece of paper (corporate, sovereign bond) is “worth” billions.
The political economics is and always was about one thing, choosing winners (First America) and losers (Second America) for purely political reasons and only for purpose of holding on to power by whatever means available.
This is a great article.
I was thinking along the same lines although not as clear.
Take the Great Depression . Take it.
Now after reading above that excess spending causes deflation not inflation my thoughts spin
I think that the 1929 - 1932 deflation was caused by the great spending spree of WW1. Tanks and airplanes were needed to end the slaughter of trench warfare. And new medicines were needed for that war's infection and the bird flu of 1918.
The result of the spending spree ---- the tech for autos, tractors, combines, mechanical miners, penicillin, sulfa drugs, vaccines
These innovations lowered the price of everything and put many miners and farmhands out of work.
Excess $$$ spent on Mcmansions = inflation
Spent on tech = deflation
Now smart assis.
Figure how to embrace deflation rather than inflate and tax your way out
This is a great article.
I was thinking along the same lines although not as clear.
Take the Great Depression . Take it.
Now after reading above that excess spending causes deflation not inflation my thoughts spin
I think that the 1929 - 1932 deflation was caused by the great spending spree of WW1. Tanks and airplanes were needed to end the slaughter of trench warfare. And new medicines were needed for that war's infection and the bird flu of 1918.
The result of the spending spree ---- the tech for autos, tractors, combines, mechanical miners, penicillin, sulfa drugs, vaccines
These innovations lowered the price of everything and put many miners and farmhands out of work.
Excess $$$ spent on Mcmansions = inflation
Spent on tech = deflation
Now smart assis.
Figure how to embrace deflation rather than inflate and tax your way out
This is a great article.
I was thinking along the same lines although not as clear.
Take the Great Depression . Take it.
Now after reading above that excess spending causes deflation not inflation my thoughts spin
I think that the 1929 - 1932 deflation was caused by the great spending spree of WW1. Tanks and airplanes were needed to end the slaughter of trench warfare. And new medicines were needed for that war's infection and the bird flu of 1918.
The result of the spending spree ---- the tech for autos, tractors, combines, mechanical miners, penicillin, sulfa drugs, vaccines
These innovations lowered the price of everything and put many miners and farmhands out of work.
Excess $$$ spent on Mcmansions = inflation
Spent on tech = deflation
Now smart assis.
Figure how to embrace deflation rather than inflate and tax your way out
It's both at once.
1) The counterfeiting aspect of the central banking scam causes inflation at a constant rate.
2) The money-lending part causes inflation in the short-term and deflation in the long-term like a sine wave.
So when the money-lending part is in its inflationary phase it *adds* to the counterfeiting. When the money-lending part is in its deflationary phase it *subtracts* from the counterfeiting. That's the boom bust cycle in a nutshell.
In its effect it is identical to loan-sharking which is why it could be deliberate (although personally I think it's driven by a cyclical conflict between bankster greed and basic logic i.e. moar debt = less disposable income = boom-bust).
If there are restrictions on the money lending the booms and busts are small to medium size. If all the restrictions are removed (as they were from the 1980s onwards) then the "bust" part can be big enough to destroy entire civilizations has the history books would show if the banking mafia hadn't taken great pains to hide it.
This article doesn't seem to acknowledge that for it to be POSSIBLE to create DEFLATION, you must first create INFLATION.
Without Fractional Reserve INFLATION, the money simply changes hands.
WITH Fractional Reserves - which is to say the practice of creating multiple EXCLUSIVE claims on the same base money, we call the process of discovering the 'money' you had at the bank never existed, or is unredeemable "DEFLATION".
When you consider that fact the central thesis of the article becomes GOBBELTY-GOOK.
You can't get DEFLATION unless there is first INFLATION.
PERIOD.
CENTRAL BANKS exist to delay the Deflationary Discovery process at the cost of making the inevittable discovery more destructive.
There is no question whether Central Banks create INFLATION or DEFLATION.
They create both.
The one begets the other in an endless loop where inflation results in unredeemable debts, resutling in deflation, resuling in price inflation as the CB attempts to compensate, resulting in inflation as the currency becomes worth less through oversupply or lack of confidence, resulting in deflation as worthless currency is written off, resulting in a new currency, resulting in inflation... and around we go.
There are problems with the article above. The first is that inflation is not a price increase; it is an increase in the money supply. A runaway inflation is when people stop accepting a currency in return for goods and services.
Naturally, every central bank wants to increase the money supply while trying to keep up consumer confidence.
Ever since the 30s, the Keynesians have tried to avoid a decrease in the money supply: a deflation. They think that increases in the money supply lead to growth, but they cannot know if that currency will be accepted.
We have had hundreds of hyper-inflations since the 17th century. Every hyperinflation was the result of the public giving up its faith in a currency.
The United States Federal Reserve Bank routinely increases the interest rate to induce hard times which washes out the malinvestments. The problem is that the Fed has followed a near zero interest rate policy for the last five years. They can't go any lower.
If the FED allows interest rates to rise, they can no longer fund the federal government. Over 40% of the federal budget is deficit financed. Any interest rate large enough to diminish inflationary expectations would cause interest payments greater than any taxes a government collects.
According to Austrian economics; the best solution would be a deflation of the money supply combined with fewer government regulations and controls. It's unlikely that the Federal Reserve Bank would be interested in doing that.
The FED might not want a hyperinflation, but events may be beyond their control. This is especially true if America's creditors, such as China, decide to sell the trillions of dollars in US treasury securities which they hold.
What you say makes sense...
This analysis has one very weak point. While it is true that inflation of the money supply creates MALinvestment, it cannot possibly create OVERinvestment, as newly printed money cannot alter the amount of real resources available in the economy. While the purchasing power of money is indeed influenced from both the money side (supply of and demand for money) and the goods side (supply of and demand for goods), it is impossible for MORE goods to be produced as a result of monetary inflation. Instead, too many of the WRONG goods are produced.
There are only two ways in which the money supply, once inflated, can deflate again: either when more debt is paid back than is created, or when the deposit liabilities of insolvent banks disappear back into thin air as has e.g. happened in Cyprus (i.e., when banks and their creditors and depositors are not bailed out).
It is wrong in principle to employ the terms inflation and deflation in the context of rising or falling price levels, since we are then discussing effects by using the names originally given to their causes. What then do we call the causes?
Talking about inflation or deflation even if defined correctly in terms of money supply is not productive since the existance of a central bank makes it imposible to define what money supply actually is. The best way to understand the subject is to follow Fekete and his analysis of capital. Capital only makes sense if it includes the future as conceived as the present value. The present value of the cash flow of a dollar per year is 1 + q + q^2 + q^3 .... where q^n is the 'discount factor' or the present value of a dollar of cash flow of the nth peroid. If p is the discount rate in percent then q= 1/(1-p/100). If p were 4% then the discount factor is .96 after one year. After three years the discount factor would be q^3 or .885. Fekete takes the formula for the sum of a geometric progresion 1 + q + q^2 + q^3 ... = 1/(1-q) recognising that the left side represents the present value of discounted cash flow of a dollar per year. Noting that 1/(1-q) = 1/(1-(1-p/100)) = 100/p then the discounted cash flow is inversely proportional to the discount rate. Ignoring the difference between the discount rate and the interest rate then if interest rates are halved then the present value of a dollar invested at p doubles. So a creditor owning a bond under this circumstance has doubled the present value and a debtor trying to liqudate a debt requires twice the capital. In effect the debtors capital has been halved to the extent of his indebtedness and this is profoundly deflationary. This is the way the author should have approached the subject. Just follow Fekete. [http://www.professorfekete.com/articles%5CAEFHowFedBankruptedInsInd.pdf]