[quote=cmartenson]Which raises the uncomfortable follow-up question, "So why is it that we are expecting a different or better outcome this time?"
[/quote]
Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”.
Well Chris, it’s because we are being led by insane people.
Bob
I want to thank you Mr. Martenson for your Crash Course and this website.
Inflation and deflation are opposites, inflation is caused by an increase in the money supply and deflation is a decrease in the money supply. You can’t have both at the same time. Housing and stocks are in a bursting bubble so of course they will have to come down to market levels but this is not deflation in regard to the money suppy. In fact they would be lower in price right now if it wasn’t for inflation. I have seen many people say that when the price of fuel goes up that this causes inflation, no, inflation caused the increase in fuel price. This can be proven by the fact that you can still buy a gallon of gas for a silver quarter or a suit for an ounce of gold, approximately.
People are asking whether we will have inflation or deflation, with the exception of housing, stocks, and fuel, almost everthing else will go up in price. Fuel is lower now due the demand decrease but inflation will bring it up again. I’m not sure about hyper-inflation but with all the newly created financial instruments (I don’t like calling it money) we definately will have inflation.
A small correction that makes the world of difference.
Deflation is a contraction of the money supply AND credit. Mish does great work on explaining what inflation/deflation is and what it is not. http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-is-it.html
While the Fed has been printing money, they are not doing so fast enough to keep up with deleveraging and falling housing prices. Here is a simple example of how falling housing prices results in delation:
You bought the home for $500k in 2005 at 100% financing - That’s 500k in credit created. The price of the house has now dipped to 400k. You sell, the next person to buy finances 100% at 400k (Let’s not even get into how this level of leverage isn’t an option anymore). Net result, -100k in credit and you’ve just had deflation. Let’s not even get into what happens during a foreclosure or when a bank writes down a rotten mortgage backed securities.
So yes, your bag of groceries has gone up $30 a week in the past year. But this is pennies in comparison to the effect of falling home values. Deflation is here to stay.
[quote=hewittr]
In this case, wages have not kept up with price increases of staples, and there is nothing on the horizon to suggest that will change.[/quote] It's not on the horizon, deflation is here and now. Falling commodity prices, falling energy prices, falling house prices, reduced credit and tighter credit standards. All these are the definition of or the effect of deflation.
Printing of money to bailout banking institutions does not mean hyperinflation. Consider that banks and other lenders are being much more prudent lenders. They are unlikely to offer no-money down mortgages, nor will they loan money to folks will less then stellar credit. The capital provided by gov’ts will be used to payback bond holders, who for at least the short term will be very finicky about financing risk investments. Much of the money that financed the credit boom originated from people that had full trust in their bankers. That trust has been wiped out.
Most Consumers are loaded up with debt and have little or no savings to draw from. They can’t not spend what they do not have. Its very likely that for the next year deflationary forces will remain strong. As consumers have already cut back on spending, product inventories are piling up and factories are being idled or shutdown. This means that there will be much higher unemployment soon. Businesses will shed jobs until they can sell off there inventories and until production declines to meet consumer demand. Higher unemployment means less money being generated and heighten anxiety among consumers, fearful of job loss.
For the past five years, Consumer demand and factory production was paid using credit made available for the housing bubble. Consumer used Home equity loans to finance spending and an increased demand for homes and commercial real estate created millions of jobs. Now both of these sources for capital and jobs is gone.
No matter how much money ends up in banking institutions, it won’t re-inflate the economy. For the economy to begin growing again, Consumers need cash to spend and access to easy credit. Its very likely that deflationary forces will remain for a considerable period (years)
On the flip side, the gov’t has to also bailout non-financial companies that are also deeply in debt and have double digit sales declines. Major manufacturers like auto manufacturing and Major Consumer services like airlines cannot remain solvent unless they operate near full capacity. Margins for these types of businesses have been razor thin either because a excessive capacity or global competition that leaves them no room for an significant recession.
We also could be facing a shift of monetary power away from the US as the dollar losses it status as the worlds reserve currency. I think over time more and more countries will accept payment in non-US dollar for international trade, which will erode the value of the US dollar in international markets. The US dollar is utterly dependant on international support to remain as a strong currency. I doubt very much that there would be a dramatic, rapid change away from the dollar, but over a period of many years.
FWIW: I expect deflationary forces to remain strong over the next year as businesses continue to shed jobs and consumers will have access to credit to finance their spending. Over time I think gov’t will find ways to put money into consumers hands and ease lending restrictions. The big bailouts and printing today will probably take years before it shows up as higher inflation. As long as credit to consumers and business remain constricted, deflationary forces will like win out.
Over the long term its likely that we will be heading for hyperinflation. More and more voters will demand more gov’t services (especially in a bad recession). Voters are becoming accustom to voting for politicians that will hand them free money and this path leads to hyper-inflation.
If the central banks leave all this money in the system, I can see why it could/would be inflationary. But surely that’s only if they leave it there.
As I understand it, the vast majority of this ‘flood of money’ is loans to ease liquidity. Can’t the central banks take it back out of the system (metaphorically burn it) once it has done its job and the loans are repaid, thus reducing hyper-inflationary risks?
jgreco
There is a time lag of about a year or two from when changes in the money supply work their way up to the consumer price level. We know that the central banks have announced intentions to expand their respective money supplies without restraint.
I try to get away from that either/or way of thinking. There are degrees of both thoughout the economy. Yes it is true that the prices of falling assets are stronger now. I don’t see prices fall in the cost of food, and my electric company hasn’t droped rates.
Keep your eye on the money supply statistics.
PS, I agree with Mish with the qualifier that the deflation is not absolute. This will not end in a deflationary depression and a strong dollar as in the 30s.
Can't the central banks take it back out of the system (metaphorically burn it) once it has done its job and the loans are repaid, thus reducing hyper-inflationary risks?
Monetary Inflation is a one way street. Because it causes consumers and investors to confuse price for value, it makes you think you are wealthier than you really are. As a result, it picks up all kinds of imbalances that accumulate with time. The bailouts shift capital from productive activity to non-productive activity. Without ever increasing sources of money, the non-productive entities would fall like a stone.
Did you guys happen to see the market this morning? Wow, finally this emergency is over <just messing with you>.
Chris, you may have been asked this previously but are you the voice of Jack from Jack in the Box fame? If so, that would explain how you know so much. The head on that guy…
Sorry, I was just a little giddy from the market today. I still have a few stocks left.
Thanks again, Chris for the informative blogs and crash course.
<ps…the site is now amazingly fast>
James -
You raise some good questions and other valid points, but I would take some exception:
"After a "hard reset" there isn’t anything wrong with starting again with a new fiat currency. "
I disagree. Fiat currency, by definition, relies upon the empowerment of government bureaucrats to "manage" the financial and market mechanics. IMO, there is definitely something "WRONG" with that, given a) their propensity for profligate "spending-for-votes", and b) government’s despotic conflicts of interest which exist when "rulemakers" are also "marketmakers".
Combining politicians with bankers, and bankers with politicians, with government laws written for their mutual protection (and the public’s fleecing) is a BAD combination - certainly some will lose at the whim and capriciousness of others, depending upon one’s level of government party empowerment.
More insidious, given the complicit desire of politicians to "spend-for-votes", and molopoly-holding banks desiring the interest payments which come with that spending, the REASON that no fiat-currencies have failed to fail, is that they DEVALUE the currency, driving up prices for the citizenry. The politicians, bankers and first-tier recipients of this "thin-air-cash", get the benefits, at the expense of the savings of the general populus - i.e., inflation’s "hidden tax".
It is this continuous inflation which is the reason for Americans now REQUIRING two-incomes, where one used to suffice in the earlier 200years of our history - inflation destroys the middle class.
SO…there is MUCH WRONG with "…starting again with a new fiat currency."
You can still have a world with electronic transactions - you just shouldn’t allow for governments to decree the value of a currency (paper or electronic) BY FIAT. Rather, it should still have the natural constraint of MONEY, (not currency), in that the currency is backed by something of immutable, and "pre-paid-for", which cannot be expanded (devalued) BY FIAT. Gold has served this purpose for thousands of years, and would do so successfully again.
The inability of the debt-holder to repay (an IOU) IS the problem.
The debt-holder has nothing of true value to repay with.
So the debt gets "repaid" only in theory, and with currency/credit created "out of thin air".
This is exactly equal to having an IOU owed you, "paid" by your borrrower, when he writes you a NEW IOU.
Now you have 2 IOU’s.
That is inflationary.
Umm… I disagree.
The Banks have insufficient assets on the books, to cover their debts, at the current fractional-reserve requirement.
If they need Goverment backing, they are technically insolvent (not enough assets).
The "money" (actually "currency") is coming from a promise of Government taxation (since they have no real assets "on hand"). This currency is printed "out of thin air", to add to the Bank negative asset balance.
There may not have been "runs" on banks (yet), but a "Bank Run" is just the instantaneous "mark-to-market" which displays the inadequacy of their balance sheet.
So…yes - there WILL be "money" (currency) printed. It will be printed to guarantee not "deposits" per se, but Bank "assets".
Your labor and energy, have been promised by your Government, to cover the printing of currency, which will go to make up the shortfall in failing Bank assets and balance sheets.
AND, there is interest due in addition to those funds.
Print, print, print.
Since the ECB has no taxing authority, and since they are guaranteeing interbank loans with US dollars, does this mean that the US taxpayer is ultimately on the hook (via debasement) for the ECB’s promise?
If so, this is starting to smell like the Treaty of Versailles to me…
Tanya.
Those discussing the contingent nature of guarantees ("maybe no money will have to be printed") need to review the Federal Reserve’s H.4.1 release every Thursday night.
ALREADY, the Fed has expanded its balance sheet from $900 billion to over $1.5 trillion in a few months. ALREADY, the Fed has blown up the monetary base by 16.7% in the past four weeks.
And that was BEFORE the new round of "unlimited dollar swaps" announced this weekend.
I don’t even want to look at this week’s H.4.1 report. But after a stiff drink, I’ll probably – guiltily – go there, feeling like a voyeur at a bloody car wreck. It’s sick to get excited by all the flashing red bubble gum lights. But Weimar Ben’s an ace with the Jaws of Life, and the horribly mutilated banksters inside the car are screaming and pounding the windows.
On second thought, maybe I’ll just let Chris sanitize it for me. I would feel too dirty, peeking at that ugly stuff. 
Question:
Is the Fed really "printing" money? Or are they just activating bits/bytes in an electronic system somewhere?
And, does that make a difference?
But what happens if private and institutional lenders around the world are willing to lend to a government that is seeking to borrow? Does this mean they avoid the need to print/create new money?Domestic loans to government do not add to the supply of money, but foreign sources do. This has two other effects. First the money loaned to government crowds out domestic borrowers depriving them of capital. Second, foreign creditors use US bonds as a base for expanding their own money supply by some multiple of the base.
Is the Fed really "printing" money? Or are they just activating bits/bytes in an electronic system somewhere?Central banks used to literally print money in excess. Now it's a metaphor for bits and bytes.
Am I wrong? Gold and Silver have little intrinsic value outside of an agreement between people that they can be used to facilitate trade. Without the agreement? Can governments ever again bind us to these substances? - I doubt it very much. We can’t eat them and surely our (immediate) future is being very hungry - to put it politely.
People in the northern hemisphere are "paid" to pump oil into tankers, some come to our country where the oil is used to power machinery and make fertiliser and deliver food to our supermarkets (down under). What happens when those people (pumping oil) aren’t getting any value for what they are doing? I think I know.
Don
No, "Printing money" is a figure of speech. They are transferring dollar credits to someone’s bank account. Just like when you go to the bank machine, it says you have $10,000 in your account. That is the liability the bank has that it owes you. There is no money in their vault with your name on it. However, you can go use your debit card at the grocery store and transfer some of your dollar credits to the store’s account in exchange for your food. Therefore, it doesn’t matter.
I think so. The world will not stop needing goods and services. Moreover, I believe all goods particularly those which have restricted supply potential must float up as the tub of money grows higher. More money chasing the same or maybe fewer goods and servies equates to inflation. As far as the hyper part ask Ben.