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Hyperdeflation Vs Hyperinflation: An Exercise In Centrally Planned Chaos Theory

Tyler Durden's picture




 

One of the recurring analogues we have used in the past to describe the centrally planned farce that capital markets have become and the global economy in general has been one of a increasingly chaotic sine wave with ever greater amplitude and ever higher frequency (shorter wavelength). By definition, the greater the central intervention, the bigger the dampening or promoting effect, as central banks attempt to mute or enhance a given wave leg. As a result, each oscillation becomes ever more acute, ever more chaotic, and increasingly more unpredictable. And with "Austrian" analytics becoming increasingly dominant, i.e., how much money on the margin is entering or leaving the closed monetary system at any given moment, the same analysis can be drawn out to the primary driver of virtually everything: the inflation-vs-deflation debate. This in turn is why we are increasingly convinced that as the system gets caught in an ever more rapid round trip scramble peak deflation to peak inflation (and vice versa) so the ever more desperate central planners will have no choice but to ultimately throw the kitchen sink at the massive deflationary problem - because after all it is their prerogative to spur inflation, and will do as at any cost - a process which will culminate with the only possible outcome: terminal currency debasement as the Chaotic monetary swings finally become uncontrollable. Ironically, the reason why bring this up is an essay by Pimco's Neel Kashkari titled simply enough: "Chaos Theory" which looks at unfolding events precisely in the very same light, and whose observations we agree with entirely. Furthermore, since he lays it out more coherently, we present it in its entirety below. His conclusion, especially as pertains to the ubiquitous inflation-deflation debate however, is worth nothing upfront: "I believe societies will in the end choose inflation because it is the less painful option for the largest number of its citizens. I am hopeful central banks will be effective in preventing runaway inflation. But it is going to be a long, bumpy journey until the destination becomes clear. This equity market is best for long-term investors who can withstand extended volatility. Day traders beware: chaos is here to stay for the foreseeable future." Unfortunately, we are far less optimistic that the very same central bankers who have blundered in virtually everything, will succeed this one time. But, for the sake of the status quo, one can hope...

Chaos Theory, via Pimco

  • Debating a future of inflation vs. deflation is radically new territory for investors. The chaotic nature of the choice facing societies is whipsawing equity markets and dominating bottom-up factors.
  • Equity investors seem to be pricing in a combination of outcomes, with the largest weighting going to a goldilocks, mild inflation scenario. But the market’s large daily swings reflect jumps back and forth as investors update the probabilities of very different destinations.

Once per quarter investment professionals from across PIMCO’s global offices gather in Newport Beach for our Economic Forum. These sessions have been the foundation of PIMCO’s investment process for years; we debate and update our short-term and long-term views for the global economy, and, from that, for individual asset classes, such as government bonds, corporate bonds, mortgages and stocks. Last month we gathered for our December Forum and the topic that dominated the discussion, as it has in recent quarters, was the fate of the euro. Will the eurozone break up? Will European governments impose extreme, deflationary austerity to control their deficits? Will the ECB monetize the region’s debts and risk inflation in order to preserve the common currency?

Listening to my colleagues make their arguments during the Forum, I was taken back to my days fifteen years ago when I was an engineering graduate student at the University of Illinois. You may wonder what a debate about the global economy has to do with engineering. It reminded me of one of my favorite classes: nonlinear systems – the study of natural and man-made systems that, at times, behave very oddly. Allow me to explain.

Most systems we interact with every day are linear: if you change an input to the system by a small amount, the output will also change by a small amount. Think about driving to work: if you leave your house 10 minutes early, you will usually arrive about 10 minutes early. If you turn up the flame on a stove a little, the pot of water will heat a little faster.

But some systems, under certain conditions, behave very differently. These systems are said to have “sensitive dependence on initial conditions” – very small changes of the inputs can lead to enormous variations of the output. Mathematicians have given these systems the label of being “chaotic” and experts in the field are called “chaoticians.” (The term “chaotician” always struck me as ridiculous. Could you imagine introducing yourself this way?) The weather is the best example of a real-life chaotic system. Predicting the weather beyond a few days is impossible because minor variations lead to large changes in the future. Go back to the driving example: if you leave 10 minutes late, rather than 10 minutes early, you might hit rush hour, and the extra 10 minutes ends up costing you an hour. Chaos theory describes the conditions under which a system changes from linear and smooth to highly nonlinear and violent, where minor changes to the inputs will lead to enormous variations of the output.

Western societies are facing a seemingly minor choice, but that choice will lead to vastly different endpoints for the global economy and for asset prices.

In a “normal” economic environment investors debate a narrow range of outcomes: will the U.S. grow by 2.8% or 3.2%? Will inflation remain at 2.0% or climb to 2.3%? Debating a future of inflation vs. deflation is radically new territory for investors. The chaotic nature of the choice facing societies is whipsawing equity markets and dominating bottom-up factors.

While we don’t know with certainty which path societies will choose, we can identify a few potential outcomes and make reasoned assessments of what they mean for the economy and for equities:

1. Austerity and deflation

Borrowing money to consume allows families and societies to live beyond their means – for a time. Once the debt accumulation has run its course, reality has to set back in. For a family that may mean getting rid of a second car, dining out less often or cuts which are far more painful. It necessarily means consuming less, and to the extent that consumption equates to standard of living, it likely also means a reduced living standard. Societies face a similar challenge. The U.S. and parts of Europe have enjoyed exaggerated living standards enabled by borrowing from our future. Now that creditors are warning us they won’t let this continue forever, governments may reach consensus to cut spending and/or increase taxes to bring budgets into balance. Whatever the mix, by definition this likely means lower economic growth and perhaps a lower level of overall economic activity until debts are worked off and real growth restored. Deflation runs the risk of creating a vicious cycle, where prices fall, causing wages to fall, causing spending to fall, causing prices to fall further. This is a lower risk for a growing population such as in the United States, whereas Japan continues to suffer from such stagnation today. Europe’s demographics are much worse than America’s. The outlook for equities in this environment is negative in the short run and potentially very negative in the long run if a deflationary cycle kicks off. Corporate earnings at some point must be linked to economic growth, and stock prices represent the present value of a future stream of earnings. In a deflationary environment cash will be king – because your purchasing power will increase by just sitting on the sidelines.

2. Explicit default

The scenario of governments not paying back their creditors is extremely unlikely for countries that have their own currencies. Why default on your debt, which would trigger a crisis of confidence in your economy, when you can simply print more money? Of course, unpredictable politics can make the unthinkable possible, as we came dangerously close to seeing this summer with Washington’s debt ceiling debacle. In Europe it is likely some smaller countries, such as Greece, will default on their debt. They simply have taken on more debt than their economies can reasonably hope to pay back. And they don’t have their own currency, so printing drachma is not an option. It is hard to imagine a scenario where an explicit default would be good for equities. Just how bad depends on the size of the country defaulting and the extent of the preparations put in place to minimize the damage. For example, if countries have capitalized their banks to withstand the losses from a Greek default and the ECB funds Italy and Spain so they are not at risk of contagion, the impact to equities should be more muted. An uncontrolled default, or a default of a larger country would be very bad for risk assets and could trigger a deflationary spiral described above.

3. Mild inflation

Mild inflation is the goldilocks scenario: central banks print money to help fund governments while they employ structural reforms to make their economies more competitive and generate long-term growth. Such structural reforms take time to produce results, often many years. Printing money provides governments with that time while, in theory, reducing the sacrifices citizens must make, and the inflation that usually follows makes the fixed debt stock easier to service, because prices (and hence taxes) increase. It often results in a falling currency, which makes exports more competitive. It is easy to see why countries with their own currencies usually choose inflation as the preferred response to overwhelming debt. Although creditors suffer because the purchasing power they were expecting has been reduced, society has to make fewer hard choices and can continue to enjoy its exaggerated standard of living until the pro-growth economic reforms come to the rescue. In a scenario of mild inflation, equities should do well. Prices are contained, the economy functions and corporate profits should continue increasing. Of course, if policymakers do not use this time to implement real economic reforms, which can still be painful for certain constituencies, mild inflation doesn’t solve anything. It just delays the necessary day of reckoning.

4. Runaway inflation

The danger of mild inflation is that it may not remain mild. Inflation is driven by expectations, the collective beliefs of what the future holds that reside in the minds of millions of people. If people expect prices to go up, they will demand higher wages so they can maintain their standard of living. This will increase the cost of labor, pushing the cost of goods higher. A vicious cycle of inflation can take hold as prices climb higher and higher. The U.S. suffered from double-digit inflation in the 1970s, and in an extreme case, Germany suffered from hyper-inflation following World War I. Runaway inflation is devastating because an economy loses its anchor. People are afraid to hold cash because their purchasing power drops rapidly and so they must hoard real assets. Interest rates soar causing investments to plummet. Central bankers are generally afraid of attempting to induce mild inflation for fear they may nudge expectations more than they hoped. Nudging the collective beliefs of millions of people is an inexact science. The Federal Reserve is cautiously experimenting with its expectations-nudging-arsenal with its recent communication innovations. Runaway inflation would be very bad for most risk assets and equities in particular because of the devastating affects on real economic growth and the increases in costs of production and of capital. A loss of faith in paper currencies would mean gold and real assets would likely be king.

5. Miraculous growth

A list of potential solutions to our unsustainable debt load would be incomplete without including a high growth scenario. It is true there could be a major breakthrough in, for example, energy technology that spurs extraordinary economic growth, which would drive tax revenues higher and enable governments to pay down their debt without asking their citizens to give up their exaggerated living standards. In such a scenario, equity returns would likely be very strong, especially for the sector enjoying the innovation. The technology sector in the 1990s was an example. However, such a scenario today is low-probability. We invest based on what we think is likely to happen, rather than what we would like to happen. Policymakers can’t count on a growth miracle and neither can investors. And don’t forget the bumper tax revenues of the 1990s actually led to increased government spending in some cases when politicians wrongly assumed the increased tax revenues would last forever.

While the expected value of two equally possible outcomes, 0 and 1, is 0.5, there is zero chance the outcome will actually be 0.5. It will either be 0 or 1. Based on the level of the stock market today, with a price to earnings ratio of about 13x in the developed world and 11x in the emerging economies, equity investors seem to be pricing in a combination of these outcomes, with the largest weighting going to the goldilocks, mild inflation scenario. But the market’s large daily swings reflect jumps back and forth as investors update the probabilities of these very different destinations.

I believe societies will in the end choose inflation because it is the less painful option for the largest number of its citizens. I am hopeful central banks will be effective in preventing runaway inflation. But it is going to be a long, bumpy journey until the destination becomes clear. This equity market is best for long-term investors who can withstand extended volatility. Day traders beware: chaos is here to stay for the foreseeable future.

 

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Tue, 01/10/2012 - 13:17 | 2050663 Mongo
Mongo's picture

Hyperponzination is guaranteed

Tue, 01/10/2012 - 13:20 | 2050674 SHEEPFUKKER
SHEEPFUKKER's picture

Yup, it's a ponzi either way.

Tue, 01/10/2012 - 13:22 | 2050683 bank guy in Brussels
bank guy in Brussels's picture

People who write articles like this hardly ever credit Jim Sinclair:

"QE to infinity!"

Which he said years ago, would be the programme.

Tue, 01/10/2012 - 13:34 | 2050718 NotApplicable
NotApplicable's picture

ZIRP4EVA

I like how the "Goldilocks Scenario" is Friedman's managed descent into Hell known as an inflation target, where our only hope is that they can "muddle-through" the disruptions, keeping them a manageable size.

Hopefully, they've got a new drug lined up for the municipal water systems to pacify the herd, who will be the ones adjusting to the "ever lower standards of living."

Buckle Up!

Tue, 01/10/2012 - 13:40 | 2050746 SheepDog-One
SheepDog-One's picture

"QE to infinity! ZIRP4EVA!"

All wrong, people cant see the big picture...this is just Crazy FEDdies going out of business sale before the wrecking ball is wheeled in.

Anyone who believes the Central Bankers plan is just to keep printing money so YOU get 'reasonably priced' food and gasoline 4EVA is going to get a real rude awakening real soon.

Tue, 01/10/2012 - 13:59 | 2050824 kito
kito's picture

yep sheepie, the qe'ers cant get it through their head that ben wont take the dollar down with the ship. 

Tue, 01/10/2012 - 14:35 | 2051037 Thomas
Thomas's picture

"Central bankers are generally afraid of attempting to induce mild inflation for fear they may nudge expectations more than they hoped." Still lying after all these years.

The average investor has one falopian tube and one testicle. By that model, I could imagine a Goldilocks outcome.

Tue, 01/10/2012 - 15:33 | 2051214 GoinFawr
GoinFawr's picture

not a surprising comment, coming from a ZH'er who presents the words of a non-voting member of the fed to be as inevitable as God's own truth.

Tue, 01/10/2012 - 15:15 | 2051039 GoinFawr
GoinFawr's picture

Not quite sheepdog. I've outlined this before: the purpose of the mountains of interwoven debt created and then sequestered into opacity (derivs and the like) exist solely as an ever handy mechanism for those with easy access to the 'printing' presses to create the illusion of scarcity/value. So, whenever they perceive that the likes of you or I are beginning to catch on to the inherent worthlessness of their issued paper, they begin calling in that debt, all the while freely ZIRP-ing themselves into whatever wealth you or I might still have left. And they ease off 'calling it in' whenever they perceive that  enough of the likes of you and I (or whoever else, big or small, that they happen to be looking to rob blind on that particular day) have been forced coerced and cajoled back to paper, again all the while printing themselves into whatever real wealth your or I might have left.

'Deflation' and 'inflation' are nothing more than tools used to modify our perception of value (Jim Sinclair) in a world of fiat currencies; tools that stand ready to obey the whims of those who control those who control those who add/subtract zeroes from the world's fiat money supply, an easily manipulated form of currency which historically has a long term trend that has always, everytime, without fail, undeniably, eventually resulted in the same thing: an utter and complete collapse in confidence. Do you honestly believe the duped MMT'er fanatics who think that this time it is different?

Ah, I see that I have struck a nerve on one of the faithful.

Tue, 01/10/2012 - 15:07 | 2051197 piceridu
piceridu's picture

ZIRPVANA!!!!

Tue, 01/10/2012 - 14:30 | 2051006 ffart
ffart's picture

Why would anyone want these fucks to succeed? Things won't get any better until everything's completely burned down, might as well get a head start.

Wed, 01/11/2012 - 03:31 | 2053645 StychoKiller
StychoKiller's picture

Mmm, Soma....

Tue, 01/10/2012 - 13:45 | 2050769 DoChenRollingBearing
DoChenRollingBearing's picture

@ bank guy

I have always admired Sinclair, and I think he has it right.  Lots more QE, whether now or later.  

But that's the rub.  Which of the article's scenarios will happen and when?  I contend that we cannot know, and so the best that each of us can do is prepare ourselves for ANY scenario or combination.

Gold is certainly part of how each of us can protect ourselves.  10% in gold is a great amount, very comfortable.  But, having cash/fiat$ there at home (ideally a few months worth of expenses) is a good idea too.  For now, I will pass on commenting about other preparations for the extreme scenarios (TEOTWAWKI) as they have been explored adequately on other threads.

"Miraculous Growth"?  That's why it's OK to hold some stocks and bonds too.  Anything can happen.

Tue, 01/10/2012 - 14:03 | 2050842 The Deleuzian
The Deleuzian's picture

Baudrillard was a bastard!...But a correct bastard!!

Tue, 01/10/2012 - 13:21 | 2050680 TheSilverJournal
TheSilverJournal's picture

How many fiat currencies have gained in value when their host country goes bankrupt?...None.

TheSilverJournal.com

Tue, 01/10/2012 - 13:41 | 2050754 bernorange
bernorange's picture

Before or after they go to war?

Tue, 01/10/2012 - 13:44 | 2050767 TheSilverJournal
TheSilverJournal's picture

Yes.

Tue, 01/10/2012 - 15:07 | 2051185 akak
akak's picture

How many fiat currencies have gained in value when their host country goes bankrupt?...None.

Excellent point, but one which the clueless and disingenuous deflationary flat-earthers will NEVER attempt to address, as their grasp of monetary history is consistently weak to nonexistent --- as it must be for them to espouse their absurd, nonsensical theories of appreciating fiat currencies, something which the world has NEVER ONCE experienced, much less in the face of exponentially rising governmental debt.

Stupidity, thy name is deflationist.

Tue, 01/10/2012 - 19:37 | 2052194 WonderDawg
WonderDawg's picture

So, it's my imagination then, that the dollar is rising? Looked at a dollar chart lately?

Tue, 01/10/2012 - 20:03 | 2052301 akak
akak's picture

You know damned well that the dollar is NOT rising --- it is merely the case that the euro is (temporarily) falling faster than the dollar.  If you are even going to try to use the idiotic and essentially meaningless propaganda tool of the US Dollar Index to attempt to claim that the dollar is rising in value, then you will have instantly discredited yourself from being taken seriously in this discussion.

The US dollar is NOT the US Dollar Index!

And show me all the prices that are falling as your dollar is supposedly "rising".

Really, why can you be so intelligent so often, and so clueless and disingenuous when it comes to this myth of fiat currency deflation?  There has NEVER been such a thing, not once, in all of monetary history, and I am hardly willing to bet that this time will be the very first.

Tue, 01/10/2012 - 20:25 | 2052398 WonderDawg
WonderDawg's picture

First of all, you need to use a little more discretion with your word choice. Your favorite word is "disingenuous". You use it in just about every post. It means "insincere". I am obviously very sincere with my posts on this subject.

Second, there has never been, in the history of money, this much global debt. I've said it before but I'll repeat it: I don't think TPTB have as much control as you think they do, and they will be overwhelmed by defaults, which is deflationary. This will trigger CDS, which is also deflationary. TPTB will be overwhlemed for a while. THEN, after a deflationary collapse, we'll have your inflation. But not until then.

A lot of things have never happened until they do. A lot of people are going to get caught with their pants down. I won't be one of them.

Tue, 01/10/2012 - 21:02 | 2052487 akak
akak's picture

Second, there has never been, in the history of money, this much global debt.

I find that to be a totally specious argument, as well as superficial and irrelevant.

The fact that the debt is global is really not relevant in any way --- it merely means the the eventual financial and currency collapse (which will be accompanied by rapid currency debasement, as ALL such events have always been) will affect most or all of the world, instead of just one nation or one region.  But the essence of the situation is no different than it was for any number of overly and unsustainably indebted individual nations and regions in the past.

When the finances of the wildly overindebted Latin American nations of the 1980s finally collapsed, did it result in their currencies GAINING value?  That is fucking insulting to even suggest!  Of course it did not --- the values of their currencies, EVERY ONE, plunged in value.  And so it was for EVERY --- and let me repeat that --- EVERY single nation in THE HISTORY OF THE WORLD!  Each and every one whose government found itself in the situation in which ours are now today ended up in currency depreciation and/or collapse.  Are you trying to tell us that each and every such occurrence was just COINCIDENCE?

(The one consistent factor that I have noted with all these deflationary flat-earthers (and I call them "flat-earthers" because they ignore the abudantly obvious) is a total ignorance of, and disregard for, ALL of monetary history.  Whether supposedly hard money advocates (such as Mish Shedlock) or fiat lovers, they share with the Keynesians and other pro-status-quo economists an obsession with theories over facts, and their arguments consistently favor the pro-Establishment position, which makes it instantly suspect to me in and of itself.)

Relative to the size of their economies at the time, the Latin American governmental debts of the 1980s were VERY analogous to ours today --- but again, you want us to believe, not only in the face of logic, but in the face of ALL historical evidence, that "this times is different".  It may be different in scale, but not in its essentials --- and if you are actually willing to bet that one of those essential characteristics is going to be an APPRECIATING fiat currency of a bankrupt government, then I pity you, as you are setting yourself up for financial suicide. 

Tue, 01/10/2012 - 21:07 | 2052544 TheSilverJournal
TheSilverJournal's picture

We're already at basically the floor of deflation, which can be exemplified by the collapse of MF Global. If asset prices go down any further from here, then depositors lose their money. Everyone that has anything in the bank will lose it all.

The game is to keep the banks solvent so depositors can withdraw their money, which is possible until the amount of currency being printed in order to do so approaches infinite.

TheSilverJournal.com

Tue, 01/10/2012 - 21:15 | 2052572 WonderDawg
WonderDawg's picture

Time will tell who is right. Obviously, I believe I'm right, but I'm also nimble and willing to admit I'm wrong. If that turns out to be the case, I'll adjust my strategy and positions to suit the circumstances. Whatever the case, interesting times to be alive. They'll be talking about 2012 centuries from now.

Tue, 01/10/2012 - 21:32 | 2052623 akak
akak's picture

Agreed.

And while I may at times get heated with you, WonderDawg, we have had many good exchanges, and I thank you for them.

Funny, the other day I was discussing with a friend, who holds most of their savings in precious metals, the idea that it might be a good idea to hold at 5% to 10% of those savings in cash (actual, folding, physical cash), because in the short run, I do believe that almost anything can still happen, including "bank holidays" and other events during which cash, and not gold or silver, would be the best asset.  Then I realized that what I was suggesting to them was the mirror-image of what many conventional financial advisers would suggest (or used to suggest), that being holding 5-10% of one's assets in precious metals.  Strange times indeed.

Tue, 01/10/2012 - 21:45 | 2052691 WonderDawg
WonderDawg's picture

Yep, cash isn't cash unless you can put your hands on it. Bank holidays, bank failures, etc., and your "money" can be inaccessible in an instant (MF Global, it ain't just for brokers anymore). Just like PMs, if you can't put your hands on it without having to go through a banker or a broker, you don't own it. The percentage, I think, depends on your circumstances. If you can keep 6 months worth of expenses in cash (and expenses will change if TSHTF), I'd advise anyone to do it. Cash means you can put your hands on it, otherwise, it's just digits in an account to which your access can be denied.

Tue, 01/10/2012 - 23:13 | 2053046 Jam Akin
Jam Akin's picture

Good dialog: flexibility and diversification (on as many dimensions as possible) will be the key to survival in what lies ahead.

Tue, 01/10/2012 - 13:23 | 2050689 Corn1945
Corn1945's picture

Inflation is devastating to virtually everyone except the very rich.

How long has the median wage been stagnant in the US? How many people are going to get a raise in the age of globalization?

Are these douchebags from PIMPco unable to do simple research? The answer to that appears to be "Yes."

I would fade the daylights out of anything that comes from Gross and his gang of perpetually wrong losers.

Tue, 01/10/2012 - 13:42 | 2050743 bob_dabolina
bob_dabolina's picture

That's a curious comment. 

I looked at the numbers/charts going back to the 70's and in every post recession period home values go up markedly with inflation. So that's typically good for most home owners and 401kers as stocks normally go up as well. So inflation isn't entirely a bad thing if you pay attention to your money and what's going on.

This case is a little different because we have had inflation during this "recovery" (like oil going from 30-100) and food based inflation was 6% last year; the DOW eeked out gain etc. However, home prices are for the most part flat/stagnant and some areas prices are going back down. The median home price in Detroit is $6,000 dollars. 

So in this "recovery" the middle class is actually shrinking and most people are getting fucked which is the natural consequence of the government/FED nourishing malinvestment. 

Tue, 01/10/2012 - 13:47 | 2050777 DoChenRollingBearing
DoChenRollingBearing's picture

That's a great comment bob_d, + 1

Tue, 01/10/2012 - 13:54 | 2050795 bob_dabolina
bob_dabolina's picture

Thanks...in addition: 

A lot of people don't realize this (100% of the OWS crew) but it was FDRs policies that actually prolonged the Great Depression and even in some ways made it worse. 

The government really needs to get out of all these markets because the market will eventually get it's way and when it does...it...will....be....bad. 

I wonder how the Greeks feel about how central planning has worked out for them.

Tue, 01/10/2012 - 14:23 | 2050924 TheSilverJournal
TheSilverJournal's picture

Housing didn't go up because of inflation. Housing isn't like oil or gold. Mortgage holders have monthly payments and lower rates means lower monthly payment, giving people the ability to pay a higher price. Greenspan lowered rates to almost 3% in 1993 and 1% in 2004. Then he raised rates in 2006 to 5% and whala..housing implosion.

That coupled with the growth in the socialization of housing with Fannie / Freddie and other housing programs. Now, the socialization of housing is just about all in with 95% of newly issued mortgages being backed by government. And the US is about to role out another socialization plan by selling foreclosures as rentals in $1B bulk sales. 

Towards the top of the housing bubble, there was so much momentum with rates being lowered and socialization of housing that prices were going up just because housing prices were going up.

My point is there are now simply too many houses and housing will go down for awhile no matter what happens with inflation. In real terms, housing is set to fall 70%-80% considering hyperinflation will remove the easy credit because the printing press will be rendered worthless, the Fed will be ineffective in backing mortgages, and American’s will become much poorer because hyperinflation is economically devastating. In order to save on housing maintenance and utility costs, more people will will living in each household. In addition, many will altogether leave the country, which will further expose the overbuilding of housing that cheap money and government backing of mortgages has created.

 

Now is the time to take the equity out of your home if you would like to keep that equity. The best way to save is with silver. Gold is a great option too. If you’re looking to save in USD, nickels now have a melt value of more than $.05.

TheSilverJournal.com

 

Tue, 01/10/2012 - 14:46 | 2051091 Spastica Rex
Spastica Rex's picture

The Invisible Hand Saves

Tue, 01/10/2012 - 13:51 | 2050790 aphlaque_duck
aphlaque_duck's picture

Peak oil changes everything this time. Biflation bitchez.

Tue, 01/10/2012 - 15:49 | 2051403 CPL
CPL's picture

Agreed,

 

All anyone needs to do is type diesel shortage into google news and that much is appearent.  These countries make everything we use everyday for a fraction of the cost in labour.  Without that diesel, trucks, factories and boats don't move.  People stand still for a while until they snap, like Pakistan currently kicking out their PM about 30 minutes ago.

 

 

Tue, 01/10/2012 - 13:48 | 2050781 mayhem_korner
mayhem_korner's picture

Inflation is devastating to virtually everyone except the very rich.

How long has the median wage been stagnant in the US? How many people are going to get a raise in the age of globalization?

 

I know you're not suggesting that hiking wages would help with the inflation problem...are you? 

Inflation is a tax, avoidable only by the ability to store currency in things you will need later.  Most people don't have that ability, which I think is what you're saying.

Tue, 01/10/2012 - 13:24 | 2050694 Kaiser Sousa
Kaiser Sousa's picture

for all REALMONEY soldiers...

"This afternoon, FOX Business Network’s Charlie Gasparino reported that “a breakup of the CME is on the table” as the firm’s executives face increasing scrutiny over their involvement in the collapse of MF Global."

http://blogs.barrons.com/focusonfunds/2012/01/09/cme-shares-fall-in-afte...

Tue, 01/10/2012 - 13:36 | 2050730 NotApplicable
NotApplicable's picture

How could it not be?

Just another part of the plan to destroy everything while securing the loot.

Tue, 01/10/2012 - 13:36 | 2050733 Irish66
Irish66's picture

EU regulators officially nix NYSE Deutsche Bourse deal; NYSE to appeal to EU commissioners NYSE informed

Tue, 01/10/2012 - 13:41 | 2050753 toadold
toadold's picture

"The firm faild by breaking the law." Uh....uhm....then why hasn't anybody been arrested, convicted, and jailed yet?

Tue, 01/10/2012 - 14:32 | 2051016 Conrad Murray
Conrad Murray's picture

They're white.

Tue, 01/10/2012 - 21:41 | 2052675 Swarmee
Swarmee's picture

They're white and rich. FTFY.

Tue, 01/10/2012 - 13:43 | 2050698 GeneMarchbanks
GeneMarchbanks's picture

If you're OJ: hyperinflation if you're Las Vegas housing: deflation. In the end... hyperinflation is a political event not monetary.

Also, Kashkari is an enormous piece of shit or put another way a former Goldmanite.

Tue, 01/10/2012 - 13:28 | 2050702 Quinvarius
Quinvarius's picture

I am pretty sure we are not waiting for them to choose inflation.  They already did choose it.

Tue, 01/10/2012 - 13:40 | 2050745 NotApplicable
NotApplicable's picture

However, this is not a one-time event, but rather a daily decision for the PPT, as well as a periodic decision by the Fed board to try the next failed round of QE (which of course is an ever shortening time-frame).

In other words, it's all about timing.

Tue, 01/10/2012 - 13:28 | 2050703 morning_glory
morning_glory's picture

They will NEVER let deflation happen.

 

Act accordingly.

Tue, 01/10/2012 - 19:44 | 2052225 WonderDawg
WonderDawg's picture

THEY might not have a choice in the matter.

No cryptic suggestion.

Tue, 01/10/2012 - 13:29 | 2050709 The Axe
The Axe's picture

Nothing but computers left  there is no investors

Tue, 01/10/2012 - 13:29 | 2050710 Oquities
Oquities's picture

deflation and inflation are now happening simultaneously in USA. this process is simply being disguised. policy miscalculations will upset this equilibrium, pulling the curtain back on the ongoing fraud in govt statistics and balance sheets, and the confidence will be lost. then, while their goal may have been goldilocks slinking away quietly, the large bear will awake and take back his porridge of hyperinflation.

Tue, 01/10/2012 - 13:30 | 2050711 francis_sawyer
francis_sawyer's picture

If there's going to be hyperinflation, you'd better have FOOD first...

Tue, 01/10/2012 - 13:30 | 2050712 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Federal Reserve to to return $76.9 billion to US Treasury....

We're all gonna be rich!

Tue, 01/10/2012 - 13:40 | 2050749 NotApplicable
NotApplicable's picture

Aaaaannnnd... it's gone.

Tue, 01/10/2012 - 13:56 | 2050809 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Exactly!  Where does the money go?  Three auctions?  Does it pay Walled Street bonuses for the year?  Where is the money coming from?  Out of thin air?  Backed with faith and credit of the US military? 

In a game of chicken, if you move, you lose, but you stay alive.  Doesn't the rest of the world understand this?  Let's say China holds on and tries to win "chicken"....well, they lose because the US will never pay back its debt.  We know they have been selling USTs but who is buying?  The Fed?  What does the Fed's balance sheet look like?  Is it a roll of toilet paper with Bernanke's scribble marks all over it?  Doesn't any other Central Bank care?  Or do they think they are too caught up in the Fiat Ponzi to make any rational choices? 

This is the greatest version of Stockholm sydrom the world has ever seen.  Not only are all of the governments going along with it, but so are the people.  There is no discourse exept about which rubber necked GOP candidate will win NH, or who will win the SUper Bowl.  No one I know is outraged about the possibilty of going to war with Iran (except you guys) and I know a bunch of hippies (etc).  I am through telling the girsl I date about it, because it always ends with me scaring the shit out of them two months down the line nd frankly, I ain't going to save the world, but at least I tried.

Fuck this shit.  Isn't anyone else pissed off?  Not just at the system, but at everything?  Look around you!  Look at the potential we have!  We are fucking awesome creatures, we have the collective muse dancing on our shoulders, and look at us!  We may be the all singing all dancing crap of the universe, but it didn't need to be this way.  We had a choice, and we chose wrong.

Fuck a bankster, fuck a cop, and fuck it all.

Tue, 01/10/2012 - 14:41 | 2051072 Transformer
Transformer's picture

"No one I know is outraged about the possibilty of going to war with Iran (except you guys) and I know a bunch of hippies (etc)."

 

Well maybe you should go to a Ron Paul rally and hang out with those folks a bunch.  Maybe find a girl there to date.

 

Don't give up on trying to tell people about it.  I also know a bunch of hippy types, and I been telling them for a couple years about all his, and they have laughed at me the whole time, with a couple of them waking up a little.  Then along comes a movie, "Thrive" which lays  it all out, couched in new age crystals and human compassion.  Suddenly most have realized what's happening.  Get some of your friends to watch it, and you will be amazed.

Tue, 01/10/2012 - 14:49 | 2051112 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Thanks for the response.  I know I am just complaining.  Whinning...bitching....maybe people will wake up....maybe....

Tue, 01/10/2012 - 20:01 | 2052306 WonderDawg
WonderDawg's picture

I get it. I played golf today (enjoying the opportunities while I can, who knows if golf will be an option in a year) with an old friend. I've known this guy for more than forty years, we grew up together. Despite my gentle but persistent efforts over the last three years, he still hasn't really opened his eyes. I asked him what he thought about the NDAA and indefinite detention, etc. He didn't know what I meant, hadn't heard about it. I explained. I asked why would they do this, now of all times (trying to get him to think). He wasn't alarmed but promised to do some research.

Slowly. Slowly. Persistent efforts. I have to remind myself not to scream and shout, WAKE THE FUCK UP! It's frustrating when you've looked at things through a different lense, and see what is being done to us, while everyone around us lives in the dark. So many of our most closely held beliefs are challenged by the reality of our current circumstances, and so it's easier to just say, "They'll work it out." They always have, why would now be different? The truth is, "they" haven't always worked it out. In our lifetime they have, true, which is why it's so easy to remain in that mindset, it's all we know by firsthand experience. History is something that happened before our time, things are different now, is what our minds tell us. It's human nature to think that things will always be as they are now.

So we keep on shining the light, hoping those in our circle of influence will see through the illusion and glimpse the truth. Slowly, maybe, we make a difference.

Tue, 01/10/2012 - 14:55 | 2051140 Chump
Chump's picture

Fuck this shit.  Isn't anyone else pissed off?  Not just at the system, but at everything?  Look around you!  Look at the potential we have!  We are fucking awesome creatures, we have the collective muse dancing on our shoulders, and look at us!  We may be the all singing all dancing crap of the universe, but it didn't need to be this way.  We had a choice, and we chose wrong.

Fuck a bankster, fuck a cop, and fuck it all.

I've read a lot of your comments over the years and this portion of this particular comment deserves special recognition.  A firm +1 here.

Tue, 01/10/2012 - 14:59 | 2051172 orangedrinkandchips
orangedrinkandchips's picture

Well put....fucking joke...period.

Tue, 01/10/2012 - 13:32 | 2050713 HamyWanger
HamyWanger's picture

ONE... TWO... THREE... ooopen the cages !!!

Before your very eyes, the most ruthless specimens of doomer hyperinflationists, brought from the most remote provinces of the Empire, will confront in a match to the death the most savage and cruel pro-fiat doomers the Arena has ever witnessed on its soil. 

Well, it's not like the same match has been played over and over again... this time is different, both sides will have new arguments, I promise. 

Tue, 01/10/2012 - 13:32 | 2050717 bugs_
bugs_'s picture

even if Kashkari says it ....even though i know he doesn't mean it....saying hyperdeflation is just to exciting this early (before lunch). 

Tue, 01/10/2012 - 13:34 | 2050719 Shizzmoney
Shizzmoney's picture

3. Mild inflation

Mild inflation is the goldilocks scenario: central banks print money to help fund governments while they employ structural reforms to make their economies more competitive and generate long-term growth. Such structural reforms take time to produce results, often many years. Printing money provides governments with that time while, in theory, reducing the sacrifices citizens must make, and the inflation that usually follows makes the fixed debt stock easier to service, because prices (and hence taxes) increase. It often results in a falling currency, which makes exports more competitive. It is easy to see why countries with their own currencies usually choose inflation as the preferred response to overwhelming debt. Although creditors suffer because the purchasing power they were expecting has been reduced, society has to make fewer hard choices and can continue to enjoy its exaggerated standard of living until the pro-growth economic reforms come to the rescue. In a scenario of mild inflation, equities should do well. Prices are contained, the economy functions and corporate profits should continue increasing. Of course, if policymakers do not use this time to implement real economic reforms, which can still be painful for certain constituencies, mild inflation doesn’t solve anything. It just delays the necessary day of reckoning.

This is what continues to happen, and will continue to happen, until an event that we can't forecasts snaps the rubber band.

Result for now: food/oil costs will be higher, but kept at reasonable levels, until either the costs snaps the breaking point of the public, or countries default on debt due to their devalued currency.  Bascially, dollars will be worth one way in the US, and another in different countries, and have no relation to their excahnge rates.

All of this of course, fucks workers in the ass.

Tue, 01/10/2012 - 13:45 | 2050770 SheepDog-One
SheepDog-One's picture

We cant forecast the event theyve set up for, but they know when its going to happen.

Tue, 01/10/2012 - 16:58 | 2051642 FreeNewEnergy
FreeNewEnergy's picture

An event we can't forecast? Like the weather?

Here in upstate NY, I am looking at parched earth, no snow, as is most of the rest of the country. I heard yesterday that the area of the US covered by snow is just 16%, when it's normally about 55% at this time of year.

Now, while I'm not complaining about a mild winter, think about all the businesses that depend on it, from salt producers to ski resorts to the guy who moonlights plowing snow. They're DEAD.

Then, think about what happens in the Spring when there is no snow pack. Drought. Coming to vast swathes of the country in a few months. So, those of you stocking up on food, good idea. Hang on to some water if you can find it.

The failure of the world governments to take any action on global warming has set this kind of weather event in motion and the effects will be devastating. We're talking mass migration of huge human populations. India is the worst. The Ganges shrinks every day, supporting less and less life downstream.

Want your black swan? The weather is it.

Tue, 01/10/2012 - 20:33 | 2052428 Arrowhead
Arrowhead's picture

If only world governments would have acted, we'd have snow......... shit!

Tue, 01/10/2012 - 13:34 | 2050720 JailBank
JailBank's picture

It is very simple. Inflation affects poor people more while defaltion affects rich people more. So which one do you think the FED will choose?

Tue, 01/10/2012 - 13:39 | 2050740 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The Fed chose their economic policy after the Great Depression.  They showed everyone how bad massive deflation is, and now ask, "Is that what you want?" before giving the answer, "No, that's not what you want!"  Then they spoon feed the "baby" boomers and their parents of the Greatest (there's that word again) Generation while they strap down Gen X, Y, and Z to the table. 

Open up, here are some peas, football, and Betty White!  Mmm...good!

Tue, 01/10/2012 - 13:35 | 2050722 Rainman
Rainman's picture

It is futile to hope for maintaining the status quo, since that "hope" is exactly what has given birth to an entire universe of ponzis and distortions for which we will pay dearly. Much of the status quo you hope to maintain was built on a mountain of bullshit and fraud.

Tue, 01/10/2012 - 13:35 | 2050723 The Deleuzian
The Deleuzian's picture

For me...There hasn't been a more head scratching-frustrating-finger eating issue than the Inflation/Deflation debate over the last decade...When it seems I have 'figured it out'...POOF!  It's gone!

Tue, 01/10/2012 - 13:35 | 2050726 achmachat
achmachat's picture

If you know that hyperinflation is imminant, wouldn't it be wise to change all your variable interest rate loans to fixed interest rate loans while they're still under 5%
it's just because central bankers don't seem to raise interest rates any time soon.

Tue, 01/10/2012 - 13:36 | 2050731 Burgess Shale
Burgess Shale's picture

Positive feedback, bitchez!

Tue, 01/10/2012 - 13:36 | 2050732 SheepDog-One
SheepDog-One's picture

Again, the problem is in accepting the belief the central bankers are working for YOU at all!

Tue, 01/10/2012 - 13:37 | 2050734 Burr's 2nd Shot
Burr's 2nd Shot's picture

I can't remember my fairy tales very well, did Goldilocks get eaten by the bears?

Tue, 01/10/2012 - 14:18 | 2050735 Pullmyfinger
Pullmyfinger's picture

Simultaneous hyperinflation and hyperdeflation is entirely possible. In brief, just because the money supply shoots to the moon, doesn't mean that anyone at the consumer level will be able to get their hands on any of it. Commodities can therefore easily become hyper-expensive as the "banks" bid them up at the same time as everyone on Main Street is hocking everything they own just to buy food.

Tue, 01/10/2012 - 14:49 | 2051113 Transformer
Transformer's picture

Ding. . . . Ding. . . . Ding. . . . Ding. . . .Ding!!!  And Pullmyfinger wins the prize of the day!!!!!  That's it. You got it.   And away we go. . . .

Tue, 01/10/2012 - 14:52 | 2051122 Random_Robert
Random_Robert's picture

Simultanous Hyperindeflation is the perfect Malthusian endpoint.

Carnage for everyone who can not afford (or understand) how to avoid carnage.

Seems that navigating troubled waters will be the "go to" skill for the next 20 years or so.

Awesome Article By Neel Kashkari- from someone who understands non linear proliferation as a foundational work of nature.

 

Tue, 01/10/2012 - 13:40 | 2050737 mayhem_korner
mayhem_korner's picture

 

 

Inflation v. deflation is an oversimplification.  Inflation in long-lived, "hard" assets is considered good, while inflation in staples and commodities is considered bad (from a consumer perspective). 

Buy-and-consume "assets" need to be looked at independently of long-lived assets and investment vehicles in the discussion, although they are intertwined in important ways.  If money velocity picks up but there is no increment of real income, then you are going to see the extra fiat funneled to buy-and-consume assets (inflating them) while servicing debt behind long-lived assets is further abandoned.

The core incompatibility is that on the one hand you have multiples more debt than the value of the assets that debt was used to purchase, and on the other hand an attempt to maintain a standard of living while servicing the debt.  This is true of both people and governments alike.

So when the debt servicing starts a-squeezin', choices must be made.  People inevitably will maintain their standard of living and abandon the debt service (foreclosure is preferable to starving).  Thus buy-and-consume assets almost always have upward price pressure and long-lived assets always have downward pressure in over-leveraged scenarios. 

With respect to sovereigns, cutting the standard of living (i.e., slashing entitlements) is a short ticket out of office.  But they do not have to directly default if they can "imaginate" fiat out of thin air.  And as Dr. Seuss concludes in the Cat in the Hat..."what would you do?"

My bet is acute inflation in buy-and-consume staples and devastating debt-deflation of long-lived assets.  And then it's just a matter of who's holding the most gold.

Tue, 01/10/2012 - 14:57 | 2051156 Random_Robert
Random_Robert's picture

The troubling thing is that the term "entitlements" is being bastardized.

An entitlement used to be a construct of the welfare state- food stamps, free health clinics, etc...

Today, the Politicos are applying the entitlement label to Medicare and Social Security- they are conveniently leaving out that people PAID into those systems from their earnings, often times for 40+ years; but now the State is trying to renege on paying them back (whie simultaneously making it impossible for anyone to opt out of the paying in part)

Leaches sucking on the blood of the host until the host's only choice is:

A) Cut off the leaches and deal with the discomfort of the resulting sores, or

B) Die from blood loss

 

Tue, 01/10/2012 - 13:38 | 2050738 ShankyS
ShankyS's picture

"we are far less optimistic that the very same central bankers who have blundered in virtually everything, will succeed this one time. But, for the sake of the status quo, one can hope..."

 

Wrong - for the sake of the staus quo we need for it to just bust all to hell so we can end this nightmare. 

Tue, 01/10/2012 - 13:41 | 2050756 SheepDog-One
SheepDog-One's picture

The central banksters have NEVER been 'wrong' at all, its just that people cant grasp what is REALLY going on!

Tue, 01/10/2012 - 13:46 | 2050774 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

I don't understand how this continues considering the ponzi has no intrinsic value.  The underlying asset of the ystem has zero value.  Everyone is playing barbie and G.I. Joe with sockpuppets.  Smelly assed sock puppets.

Tue, 01/10/2012 - 13:49 | 2050782 SheepDog-One
SheepDog-One's picture

Just because they say it continues, if its not today when they wrecking ball it all, maybe tomorrow or maybe next summer or fall, but it certainly does NOT just go on as the ZIRP4EVA crowd believes. 

Tue, 01/10/2012 - 13:58 | 2050818 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

But it does!  Look at it!  It's still alive, wriggling around like the worm it is!  Yet....it doesn't exist!  It never did!  The Fiat Ponzi is worth nothing!  It has no value!  None!  Everything (gold, houses, labor) is all relatively compared to something (fiat) to something that IS NOT REAL!

Tue, 01/10/2012 - 14:15 | 2050910 strateshooter
strateshooter's picture

it can go on forever.The FED can print 10 trillion $ to buy all shiity debt from the system...clear the road...and write it down over a hundred years with increasing devalued currrency .

It can go on forever ....just nned more debased /digitally created $ feed into the system .

Its Central Banking dude !! The most powerful man made creation along with the A-Bomb. Bot are equally destructive.

Tue, 01/10/2012 - 14:15 | 2050911 strateshooter
strateshooter's picture

it can go on forever.The FED can print 10 trillion $ to buy all shiity debt from the system...clear the road...and write it down over a hundred years with increasing devalued currrency .

It can go on forever ....just nned more debased /digitally created $ feed into the system .

Its Central Banking dude !! The most powerful man made creation along with the A-Bomb. Bot are equally destructive.

Tue, 01/10/2012 - 15:47 | 2051390 MachoMan
MachoMan's picture

This is why hyperinflation (the death of the currency) is a political event...  and based upon "faith".  So long as faith remains (we're devout!), the currency can remain...  hence why all involved feel completely justified in uprooting the rule of law and common decency...  in the name of manipulating faith/keeping up appearances.  Of course, this notion is always unfounded in that those entrenched in the decision making process seem to be more benefitted by the process...  oopsie.  At some point the productive demand alternative means of exchange.

Whenever I see unemployment numbers, I just think of a picture of the virgin mary spontaneously appearing on some toast...  it really was a supernatural phenomenon...  if you have conviction in your faith [and can willfully suspend disbelief (probably the same thing, but I'll give those of faith the benefit of the doubt)].  There really is a recovery underway!

Wed, 01/11/2012 - 04:30 | 2053686 StychoKiller
StychoKiller's picture

In my dreams, I can fly like an arrow -- doesn't mean it happens when I'm awake (unfortunately!)

Tue, 01/10/2012 - 13:44 | 2050765 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Does anyone else feel like it will never end?  I have been feeling like it will never end since the last pump cycle.  The Occupy movement ended up being outdoor homeless sheltors, the rich are not affected, and the poor don't understand the root causes (I am generalizing, but I think somewhat fairly). 

I didn't think there was any slack in this economy left after the August meltdown.  Europe followed and it looked like it was lights out.  Now equity is "fine", Europe is still intact, and everyone is still in the breadline thinking happy thoughts.

Seriously, are the fucking bankster/politicains brilliant?  Because I always thought they were stupid.  But if this shit goes past March I won't believe it.  And if it does, it will be another summer where no one sells there house, pretends they will the "next year" and goes on collecting unemployment, eating food stamps, and driving in circles.

Tue, 01/10/2012 - 13:51 | 2050789 mayhem_korner
mayhem_korner's picture

Does anyone else feel like it will never end?

 

Guessing here, but I think there's a tornado syndrome with this.  Unfettered curiosity to see it, but not sure how close to home (even among the most well-prepared).

Tue, 01/10/2012 - 13:53 | 2050797 DoChenRollingBearing
DoChenRollingBearing's picture

My guess Mr L is that the whole notion of a country going down the tubes implies a quick end.  Since we have seen a slow drip-drip-drip since 2007, I have come to think that the CAN COULD GET KICKED down the road longer than we think.  Certainly longer than I thought 3 years ago.

I forget who it was who said that there is a lot of ruin in a country.  What that means is that things can slowly get worse over a LONG period of time before the reckoning.  Rome and Britain are good examples.

But, the funny thing is, is that it COULD happen very fast too.  VERY hard to predict.  Diversification!

Tue, 01/10/2012 - 14:01 | 2050830 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

How the fuck does Central Planning work?  It is mind control, ok, but then there is the REALITY of the system:  There is no system.  It's not that the system is corrupt, it's not that the system isn't in equilibrium, there is no system!  It's not a house of cards....there is no house!  None!

Tue, 01/10/2012 - 14:35 | 2051033 blu
blu's picture

It will take as long for this house of cards to collapse as it takes to finally run out of cheap/available crude oil resources.

I give it 10 years tops. 5 years if we screw it up.

Everything they are doing now is just scrambling around in anticipation of the day when 100 years of music finally stops.

Tue, 01/10/2012 - 14:44 | 2051088 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

So in the meantime we have 10% and increasing inflation?  We have 25% and increasing unemployment?  We have 100% and increasing debt/gdp?  I believe that oil is the crux of the situation, but how the hell will the economy play house for the next five years?

Tue, 01/10/2012 - 15:56 | 2051443 MachoMan
MachoMan's picture

More and more self reliance and self reliant community building...  localization...  etc.  There simply isn't much of an alternative...  think worthless homes being destroyed to plant neighborhood gardens...  (which is really just an exercise of eminent domain...  although, cleverly disguised as a rudimentary "health and safety" issue).

If you work less and less, there is more time for family building, food production, repair and maintenance, etc.  Just turn back the clock a few decades.  Rhyme it will.

Tue, 01/10/2012 - 13:39 | 2050742 Eally Ucked
Eally Ucked's picture

Did he really present any argument that inflation is so beneficial to most members of society or we have to take it as an axiom given to us by Big Brain Kashkari and other assholes? And of course, invest in stocks to minimalize inflation influence on life of most citizens. The problem is most of citizens don't have money to risk on stocks and the only benefit that idea brings to society is Kashkaris get richer.

Tue, 01/10/2012 - 13:51 | 2050755 Mercury
Mercury's picture

"I believe societies will in the end choose inflation because it is the less painful option for the largest number of its citizens."

Specifically he hopes that unelected and unaccountable technocrats will in the end choose inflation because it is the less painful option for the largest number of its citizens.

Sort of like hoping that in the end the commissioner of the NFL will choose to have a football game.

Tue, 01/10/2012 - 13:42 | 2050758 Smiddywesson
Smiddywesson's picture

Runaway inflation would be very bad for most risk assets and equities in particular because of the devastating affects on real economic growth and the increases in costs of production and of capital.

This article should read that runaway inflation is good for stocks, but you lose buying power with those "profits."

Ex:  Wiemar Germany Oct. 1922 to Oct. 1923.  The market rocketed up 27x in value as the currency was destroyed and people who were prevented from holding foreign currency drove their marks into anything they thought would hold value.  Unfortunately, the purchasing power of those stocks declined.

Tue, 01/10/2012 - 13:43 | 2050760 SheepDog-One
SheepDog-One's picture

Just what they want everyone to believe, that the Central Banksters are out there working to battle inflation or deflation. Man this is funny.

Tue, 01/10/2012 - 13:45 | 2050771 sojourner_man
sojourner_man's picture

Images work best here.  I've long insisted that any 'engineered' structures are subject to 'natural' forces never quite well-enough understood by the engineers.  Witness:

Tacoma Narrows Bridge Collapse "Gallopin' Gertie"

http://www.youtube.com/watch?v=j-zczJXSxnw


Tue, 01/10/2012 - 13:50 | 2050784 Bohemian Clubber
Bohemian Clubber's picture

Inflation in things you need, and deflation on things you want...

Tue, 01/10/2012 - 13:50 | 2050785 Meremortal
Meremortal's picture

Good article, but it gets the Captain Obvious Award if you've been following the festivities for a while. Bernanke and the rest have been walking the tightrope between deflation/inflation for years. Many (notably here) have predicted an imminent collapse for several years. The predictors have been wrong, so far.

This is important because all predictions will eventually come true, but the way investors prosper most is by being right at the right time.

In 2011 the S+P went nowhere, gold returned 10%. 10 year Treasuries returned 17%. Both good, but who around here cashed in on the larger return? What was the consensus on bonds all year? You remember.

Millitary commanders plan for all contingencies, not just the worst ones. I have prepared for a total collapse, but I am also positioning for another possibility. We may experience a continuation of the slow grinding deleveraging for years to come, and no dramatic crash. As the article notes, we can devalue our way forward with the printing press. So, I prepare for the possibility that the PTB don't crash the system and send us all into Mad Max land.

This idea will disappoint those with small or no assets who long for a dramamtic crash as a way to drag everyone else down to their level. What a lousy outcome for all. The big crash may happen, but what if it does not? What if we experience a period of deflation followed by a period of high (but not hyper) inflation, a la Jimmy Carter?

I believe inflation is preferred to deflation but I have diversified to be prepared for either. Interesting thing about isolated farmland, it gives you someplace to try to survive if the worst happens, and it is a hedge against inflation. Due to ag exemptions, holding costs are low, and farmland produces food, water and a place to fatten animals. That's just one leg on my stool, the other legs are the usual ones.

Good luck everyone, whatever the outcome.   

 

Tue, 01/10/2012 - 14:06 | 2050846 Pullmyfinger
Pullmyfinger's picture

I share most of your sentiments; however, as I contemplate the precious metals market and its dynamics with respect to the value of fiat currencies, the potential for sudden and catastrophic collapse is clearly evident. I feel silver in particular is the achilles heel of the entire dollar system at this point. The realization of significant shortages, currently masked by derivatives, will produce an immediate contagion in gold. We are all just waiting for some industrial consumer to whisper "fire," and all hell is bound to break loose.  Silver Eagles alone, for example, sold to the tune of nearly 190 tons last month. If that becomes consistent, month after month, annual sales will thus equal roughly 10% of total world production. Not insignificant. We are reaching a breaking point. Just at the street level, deliveries are taking three to four weeks now. In 2008, my purchases arrived in less than a week.

 

 

 

Tue, 01/10/2012 - 14:39 | 2051061 Rakshas
Rakshas's picture

I've found myself mentally wandering along a similar thought path lately; it is reasonably well known that there remains a relatively large short position held by some rather unique baw bags in the bankster realm, and as you've pointed out silver is something of an achillies heel for these DBMF's. At today's prices 32 billion takes the years production assuming 1x109 oz available for purchase; yeah it would never be that easy but why not give it a go..... surely somebody out there... perhaps an Persian Sovereign of no particular use otherwise has some pocket change hanging around.... please please won't somebody bitch slap these fukkers where it hurts?!?!

 

And if the theory doesn't play out in reality think of all the kick ass mirrors they could make....er to deflect the laser guided bombs....an' shit. 

 

And for the Love of Dog, for those of you who struggle - and you know who you are:

http://www.wikihow.com/Use-Than-and-Then

Tue, 01/10/2012 - 14:08 | 2050865 Smiddywesson
Smiddywesson's picture

Meremortal,

Best post I have read in a long time.  I, too, thought the article was a little simplistic as we have passed the point where some of those alternatives are out of the question.  Global derivatives are GROWING at a rate of 30% per annum.  Interest rates are pinned at zero and the level of soverign debt has reached unmanageable levels.  As IMF Chief Economist Olivier Blanchard recently pointed out in his 2011 summary, excessive debt levels scare the bond market and necessitate higher rates, but spending cuts and austerity impact growth and do so too.  So the long and the short of it is you reach a point of no return, where nothing you do will fix the ever worsening problem.  Blanchard apparently thought the same, because he said it would take unprecedented (my words) cooperation amoung political leaders and complete follow through on thier initiatives to grow our way out of this, AND two decades!  It's not going to happen. 

What will happen is Bernanke will follow through on the fifth of five tools he identified in his 11/21/2002 speech.  He will peg to gold, ramp the price of gold through gold purchases, and print like crazy.  (I say they tie their fiat to the SDR and then tie the SDR to gold).  Devaluation, it's what's for dinner.  They will also establish price targets to inflate to 2007 price levels plus 2% for each year since then.  (as per his 5/31/2003 speech on Japan)  Why believe me?  Read what the Chairsatan said:

"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."

 

Tue, 01/10/2012 - 13:55 | 2050802 ChacoFunFact
ChacoFunFact's picture

The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life.
Theodore Roosevelt

Tue, 01/10/2012 - 14:09 | 2050871 strateshooter
strateshooter's picture

Its no contest...the Bernake refuses to contemplate DEFLATION.

So its QE to the power x until DEFLATION THREAT IS ZERO.

The ? is...can he control inflation with all the cash in the system when he finally says I.m done. I don't think so... food, gas etc all rising as the $ falls (due to QE and perceptions around it).

Its the Road to Zimbabwe folks ...starring Timmy G and Benny B.

Buy oil, buy gold , buy tech(Intel etc), buy GE ...BUT CASH WILL BE TRAHSED TO SAVE THE SYSTEM.

The course has been set..and we are locked in.

Tue, 01/10/2012 - 14:16 | 2050917 Smiddywesson
Smiddywesson's picture

Pullmyfinger said it succinctly, "We are reaching the breaking point."

Through sheer fatigue, they have people conditioned to think they can muddle through this.  They can't.  Below are some of the canaries in the coal mine.  Things indicating the devaluation is coming.  They fall into two categories, indications of systemic collapse, and indications of TPTB preparing for the collapse.  The biggest indicator, of course, is gold and silver price action and efforts to suppress those prices. 

Canaries in the Coal Mine:

·         Looting of federal pension funds to make ends meet

·         The Food Safety Modernization Act (Jan. 2011) gave the FDA and Homeland Security complete control over all food production, handling, and distribution, even your backyard garden.

·         China is involved in panicked buying.

·         Open bickering about backing sovereign bailouts with gold reserves undermines the “gold is just tradition” game.  Until recently, it was unthinkable to undermine the party line so openly.

·         Frequent rules changes, such as mark to market, which of course, mask the fact that there are no rules when governments are desperate.

·         Previously reluctant ratings agency trying to salvage their reputations because they know what’s coming.

·         Punishing ratings agencies and their execs for downgrading AAA ratings.

  • ECB and Fed reaching 75% gold reserves on the asset side of their balance sheets
  • Countries like Venezuela repatriating their gold
  • Bank runs in the EU and at BoA, but no media coverage
  • Open protests regarding economic conditions all over the world
  • Intervention in former safehaven currencies like the Swiss
  • Zero interest rates forever
  • Political leaders, finance ministers, and bankers retire to spend more time with their families, others allegedly attack maids who later turn out to be prostitutes.
  • Forceably replacing elected officials with bankers called “technocrats.”
  • Markets driven by rumors spread by political leaders who have run out of options.
  • Gold spikes down result in gold vendor sites experiencing technical difficulaties
  • Premiums on physical gold and silver rise.
  • China’s economy hits a brick wall
  • Defaults are not defaults, just a voluntary 50% haircut
  • Hypothecation saves the COMEX, thereby robbing clients and ruining the Comex. 
  • Banks putting caps on how much money you can withdraw. (France, BoA)
  • Libyan oil trade in gold precipitates an invasion, and their gold disappears.
  • China agrees with Russia and Japan to do business without the US dollar
  • Elevation of the National Guard Bureau Chief to the Joint Chiefs of Staff
  • Indefinite detention of American Citizens without trial is quietly legalized.
  • SOPA to shut down troublemaker web sites
  • The emergency broadcast system is beefed up so it can be used to shut down access to information.
  • War drums with Iran and Syria.
  • The Chief Economist of the IMF gives a year end speech basically saying everything has to go perfectly for 20 years or it’s all over, which he says is unthinkable.  He never mentions devaluation, not once.
  • Economic numbers will become more unbelieveable near the end, because there’s no costs to lying near the end.

 

Tue, 01/10/2012 - 14:26 | 2050985 Pullmyfinger
Pullmyfinger's picture

All good points. But I wonder if the US military truly understands the catch-22 involved in attacking Iran, given its inevitable effect on energy and gold prices. i.e. Attack Iran -->drive up gold --->implode the dollar system --->kill the US military.

Way too simplified here, of course, but that's the gist of it from this corner. The morons in the Pentagon can't recognize a gun to the head, even when its handed to them with instructions??

Tue, 01/10/2012 - 14:27 | 2050990 mayhem_korner
mayhem_korner's picture

 

 

Smiddy - nice post, always appreciate the research.  Your bringin' the fire and the brimstone t'day. 

Tue, 01/10/2012 - 14:22 | 2050955 ajk24455
ajk24455's picture

I think the idea that the Fed or any other government entity has a choice is pure folly.  I think they want inflation, but how could they possibly guarantee any kind of outcome.  It's an ever growing hubris on their part. 

There's about a quadrillion dollars of nominal value in the credit and derivatives markets.  Clearly it's not all bad debt, but even if 20% of it is bad that requires 200 Trillion dollars. 

It's a lot cheaper to write the debt down and let some banks fail.  Eventually the masses will see this and governments everywhere will have no choice but to listen.  Assuming democracy is not repealed of course.  I also disagree with the notion that inflation is the less painful option.  Japan has been able to maintain a very high standard of living over the last 20+ years.  I seriously doubt hyperinflation would bring the same stability. 

Tue, 01/10/2012 - 14:35 | 2051036 jimmyjames
jimmyjames's picture

Japan has been able to maintain a very high standard of living over the last 20+ years.  I seriously doubt hyperinflation would bring the same stability.

***********

I agree with your post but we can't forget that Japan was the only country in deflation those 20 years and the rest of the world was in inflation-actually in hyper-inflation when you look at the credit market-so we were buying everything Japan could produce and they had robust exports and low unemployment-

Now that world trade is decreasing-those same factors are not in play anymore for Japan and will never be for us-

Tue, 01/10/2012 - 14:24 | 2050969 jimmyjames
jimmyjames's picture

"I believe societies will in the end choose inflation because it is the less painful option for the largest number of its citizens.

**************

huh?

First of all-Ben has no control over deflation-if he did-velocity would be escalating and debt would be decreasing as abundant money supply would be used to diminish debts-

Deflation is much less painful-but only so long as governments/central banks stay out of the market and allow bankruptcies to happen as they are supposed to and allow prices to decrease with the money supply-

Failure is our ticket out of this mess-

Tue, 01/10/2012 - 14:27 | 2050986 AldoHux_IV
AldoHux_IV's picture

I believe in a 3rd option: the end to central banks and central planning which ushers in a new era of economic prosperity.

In order for that to happen inflation or deflation will be the catalyst because it's my belief that central banking tools to promote inflation actually lead to deflation in the end and it's a matter of when the masses are sick and tired of the gyrations of bubbles and bursts that happen all too frequently now-- in other words, when will the masses wake up to the scenario of high prices and/or no economic growth? It is eventual (though not soon enough) that central planners will no longer take away the free will of the people without having some reversion to the mean.

Tue, 01/10/2012 - 14:31 | 2050989 LouisDega
LouisDega's picture

Who cares. I paid $13 for a 38 oz. mega bazooka of folgers coffee at Blow jobs... Err, BJ's last light. Cheaper than it was 5 years ago. Life is good. I have my Folgers

Tue, 01/10/2012 - 14:51 | 2051069 jmc8888
jmc8888's picture

All that talk, some of it pretty good.  But nothing on how to actually grow an economy.  Nothing on actually growing the PHYSICAL economy.  Nothing on the importance of real things.

So the article is pretty good, except it's worthless because it views the situation from a monetarist's perspective.  How to view a crisis of monetarism through the viewpoint of a monetarist.

When the problem is monetarism, that is a major whammy blocking you. 

 

Impeach Obama

Glass-Steagall (because the debt isn't normal debt, and it is allowed by the current rules)

American Credit System (because we don't need to be monetarists, America was founded as a collection of anti-monetarists that believed in the physical economy)

 

Of course in monetary world they have the print option.  Unless you ceded it.  They won't allow a deflation collapse.  But are the people holding that opinion aware that those people can be run out of power? The people can stop the printing.  But what then...they accept the fraudulent debt and austere themeselves to pay off fraudulent/impossible/(debt that was inflated before creation...the amount needed to be created due to the world around them )? Or do they continue to allow their corrupt/incompetent leaders to keep printing for the same fraudulent debt? 

In the land of the paper pushers, the physical economy means dick.   Until it means the opposite, as the suspension of sanity is lifted and the aura of fraud is gone due to sheer collapse leaving nothing but the real consequences from real needs going unment due to an insufficient physical economy left decaying during the paper pushing imperial monetarists reign of Phd sophistry.

Also when running the debt deflation game, scarcity is an inflator that confuses the sophists.  As the real physical economy becomes scarer and scarcer, prices for needs based on it go up.  That's not economic growth.  Some may even see it as a positive influence to cancel out the deflation.  You can call those phd's true believers (of economic sophistry).

 

Glass-Steagall the fraudulent debt.

Let the worthless mobs of debt and other pseudo economic paper of broke banks and others have a 'credit event'.

Use the switch to the American Credit System to restart the economy using credit uttered for wealth creating projects and actually create something of value, and a real economy, rather than take the austere/print option (for fraud) out of the equation.

Just like the weathermen all across this country, the model of how things (weather systems or economy) all runs, is incomplete and wrong.  You create a physical economy, by doing 'stuff' that is physical in nature.  Especially when that 'stuff' is a platform to bigger and bigger gains in the return in subsequent projects.   This is not bridge repairs.  Those are OTHER physical things we need to do.  But projects for Fusion, NAWAPA, machine tools, space program, all sorts of science, mag lev, the list goes on and on.   We the people have already imagined what we need to do for many decades.  Many of the ideas have been fleshed out for many decades.  We just need to do it.  The list is long, the actual wealth creation in the projects we've held ourselves back from is probably greater to that entire output of the United States since 1776.   So no, they physical economy and real wealth creating opportunities are all ahead of ourseleves.  If we don't constrain ourselves to monetarist thinking based on pure sophistry.

Tue, 01/10/2012 - 14:45 | 2051089 Urban Redneck
Urban Redneck's picture

For a guy who apparently loves talking about non-linear systems, cash & carry seems to view the inflation and deflation options in a rather linear fashion (or perhaps two distinct vectors originating in the here & now).

Tue, 01/10/2012 - 14:47 | 2051099 the grateful un...
the grateful unemployed's picture

the current inflation is inverse, prices of goods are not falling as fast as wages and personal income. when prices on consumer goods fall they fall uniformly, but when wages fall they fall arbitrarily. (Fall Mountain, Just Don't Fall on Me, Jimmy Hendrix) a guy who loses his job experiences a sudden surge of inflation, but measured out against the average the numbers don't mean too much. as a matter of demogoguery its easy enough for politicians to play the 90% who experience little or no inflation against the 10% who face massive and lifechanging inflation. The politicians are acutely aware that imposing even modest inflation on the 90% is heresy. (it matters little who has to bear the brunt of average inflation numbers, so those who have jobs see deflation, prices falling because their wages are the same or better, and the 10% see massive inflation, as the rent is suddenly a lot more than I make)

deflation for the 90% is runaway deflation for the 1%, who make less money on the goods and services they sell for profit. austerity programs are their way of expressing displeasure with deflation, but a certain amount of deflation is necessary to balance the overall inflation numbers. If the 10% suddenly becomes the 15% there will be more deflation for the 80%, but runaway deflation for the 5%, former 1%. the rich can lose a lot of money and still be rich however.

the goal of running the economy is to see that none of it spills into the 90%, which shrinks all the time. inflation or continued losses in employment is baked into the cake, its not policy unless you consider protectionist policies to restore Americas economic autonomy a policy option. theres not one single pol who would give you that alternative.

Tue, 01/10/2012 - 14:55 | 2051145 orangedrinkandchips
orangedrinkandchips's picture

Obviously I am an idiot, BUT WHO WANTS INFLATION? GOOD FOR WHOM???

 

A majority?  ARE THEY KIDDING? HOW? WHY? IM LOST....

Tue, 01/10/2012 - 15:08 | 2051199 the grateful un...
the grateful unemployed's picture

buyers of credit? family buys a 10000 home at 2.5% interest. twenty years later the home is worth 20000 and interest rates are 5%. the housing bubble made a lot of people rich who had no skin in the game.

Tue, 01/10/2012 - 15:27 | 2051274 pagan
pagan's picture

THIS IS SO EASY!

We are now currently in the west facing DEFLATION. The powers to be do not want deflation. So they print money... BTW, Benanke did a superjob preventing a deflationary crash. This deflatinary pressure is still on. But Bernanke does not want to do QE3 yet.

But he will be forced to do a QE3, guessing in the second half of 2012?

 

 

Tue, 01/10/2012 - 16:09 | 2051492 Snakeeyes
Snakeeyes's picture

Sorry Tyler!

Central planning by The Fed AND the Administration in the housing market is getting worse, not better. One can argue that they both created inflationn then deflation in housing. Now we have neither, but a Fed that resembles Disney's Tower of Terror.

http://confoundedinterest.wordpress.com/2012/01/10/ezra-kleins-on-mortgage-modifications-and-the-perils-of-centrally-planned-housing-and-mortgage-markets/

Tue, 01/10/2012 - 16:32 | 2051569 Meatier Shower
Meatier Shower's picture

What, no Hyper-repothication?

Wed, 01/11/2012 - 01:20 | 2053502 Dingleberry
Dingleberry's picture

We have been living in undeniably inflationary times for the better part of a century.  Look at what has happened to the dollar since 1913. Here is the deal: you have to try to keep up with inflation or drown.  But unless you are connected or lucky or incredibly smart, you won't keep up.  It's like swimming against the tide.  Eventually, you slip up or get hurt, fired, etc.  That is why, despite everyone in the house working double time, and massive productivity gains, your standard of living contiues to get tighter and tighter and tighter.  That is all the economics you need to know.  Put the bullshit "inflation vs deflation" shit to bed or in a philosophy class where it belongs.  You ar being, and will always be, squeezed by inflation.

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