Deflation still winning the day

I probably should let that inane statement stand for itself, but I’ll comment on the one sane part of the message.
"Yes jgreco, an implosion of the US dollar is, as judged by fundamentals, inevitable."
Inevitable does not mean today, tomorrow, soon, or even within a few years. Just because you read that the dollar is a sick sick dog (it is) doesn’t mean deflation isn’t happening and won’t continue for a long time. Those that are denying the current evidence of deflation do not understand what deflation is.

jgreco, as I said before you wrote, I agree with you on deflation.

But the dollar issue is also of interest; so don’t be shy, use something stronger than an ad hominem statement to refute the idea that geopolitics (and thus force) is a determinig factor in the world economy.

 

Ever look up in the night sky and see the inflationary Death Star? It’s a constellation of fiat currency, democracy, deficit spending and foreign wars. And we’ve got 'em all.

From a 95-year perspective, despite presiding over the worst deflation ever (30% during 1930-32), the Fed managed to destroy 95% of the dollar’s purchasing power. Short-term deflation; long-term inflation. The Death Star can be beaten back for a time, but never vanquished.

Unlike 1930-33 when it foolishly let the money supply shrink by a third, this time round Helo Ben has got M1 sizzling at +19.5% annualized for the past three months. But the typical monetary lag is 12-18 months. So we can’t expect instant results, as Ben slams the economic supertanker’s throttle to max thrust from a standing start. Still takes a couple of hours (or years) to reach cruising speed, no matter how much ‘body english’ Benny applies to the brass handle.

But we can review the minutes of the last meeting. In mid-2003, Mad Al Greenspan slashed Fed Funds to 1% and held it there for a year. No one thought in mid-2003 that another Bubble was possible. Nasdaq 5000 was regarded as THE Bubble, and it was believed to be over for good. Indeed, despite ‘zero-zero-zero’ financing on cars and houses, very few saw the implications. It wasn’t until mid-2005 – two full years after the one-percent rate started – that most of us collectively woke up and exclaimed, "OMG – we’re in a scorching, life-changing real estate Bubble!"

Aks yo’self: what Bubbles do we still have? I would name two: Treasury securities and the US dollar. Both are WAY overvalued. And ironically, fighting the collapse of the late housing, equity and credit Bubbles will most likely end these remaining securities Bubbles.

What would the US look like, with a devalued dollar and painfully high domestic interest rates? Why, like a typical developing country. And during the post-1971 fiat currency era, we’ve seen dozens of developing country Bubbles, from LatAm to Asia to eastern Europe to Russia to Iceland.

By slashing short-term rates, central banks are once again setting the stage for a surge of yield-hungry speculative capital out of the rich countries that still save (meaning Europe and Asia) into shaky places with shaky regimes that can’t finance themselves. And this wondrous, nuclear-armed banana republic, the United Snakes of Amurfika, fits that profile to a tee.

As a ‘hot money’ destination, the US can boom again in Bubble III (copyright machinehead, 2008) – as incredible as it may seem today, amidst the bitter grey ashes of Bubble II. But in the Bizarro World of fiat-currency economies, any crazy, effed-up thing can and will happen. Just review the events of the past four months to convince yourself that reality is far more improbable than fictional fantasy.

So, as your local Realtor ™ has sagely advised since time immemorial …

Money mouth BUY NOW, BEFORE PRICES GO UP! Money mouth

Cool PIMP MAH HOUSE, BEN BABY! Cool

Agreed inflation looks unlikely.

But how about this as a scenario.

If the dollar were to really bomb then things like oil imports would become very expensive as would other essential imports. This could feed through into the real economy as inflation in essentials such as fuel oil, food, gas which people will buy before luxuries which may well go down in price at the same time due to lack of demand. In this case people with just enough money for essentials would experience inflation, people with lots of money to spend on luxuries in comparison to their essentials expenditure might on balance experience deflation.

Just one possibility out of the thousands out there at the moment!

Love the post Machine. Hey, you should take a crack at responding to my last post in the subscriber-only forum: "Chris, what would an auction failure look like."

Iceland USA: I’d agree.
I think it IS possible that the USA shares an Iceland inflationary experience. Comparing USA GDP to Debt and stating that it isn’t like Iceland’s debt of 10x GDP may be, in my neophyte view, be a mistake.
We know USA GDP is "Enron’d by 40%, we know most of what really is in GDP is borrowed - well was and is there no more. I have to find the amount again for the portion of GDP that is borrowed consumer debt, but even not discounting GDP for what was put on the real property ATM or plastic just with Enron’d GDP USA Debt is 654% greater than GDP.
654% converted in hexadecimal spells B A N K R U P T which spells hyperinflation.
Back out what used to be borrowed and I’m certain it is even worse.
Add to that the junk that replaced the T-Bonds (and maybe gold???) and the Fed is now AIG.
Yah think? I do, otherwise why not show some transparency. Where is the 2 trillion bucks? Ben? Paul?
Not to bust on anyone, but you let ex-Nixon aids to Watergate plumbers in the vault along with a professor who says that the 1929 depression was hard to explain and personally I would be the least bit surprised.
With these nutjobs, the solutions for the problems, seems to me, are bigger than the problems that they were supposed to solve.

For some reason people think inflation and deflation are mutually exclusive
and they can’t coexist. This is wrong, they can and they will.

  • monetary inflation will be followed by price inflation (IN NOMINAL TERMS)

  • asset price deflation in REAL TERMS

I.e., if you look at the prices in today’s dollars, asset prices will
decrease but if you look at the prices in dollars current at the time, the
prices will increase.

E.g. a house that is worth $100k today will cost $200K couple of years from
now (inflation) but the $200k won’t buy you as much in essentials (food, energy
etc) as the $100K did today (deflation).

 

 

Cash is king in deflation. Earning 3.3% in a money market doesn’t sound sexy, but it’s better than losing your principal.
What’s bad? Everything else: Commodities, gold, all currencies except the yen, stocks, bonds, real estate.

Good point SteveS , let’s just hope that whoever builds these electric cars (solar, wind power, whatever…) can retail them for no more than 5 to 10 thousand $ each or it won’t matter . Who the hell is going lend the average Joe any money to buy the damn thing, 'cause GM won’t have the "liquidity" to finance anything.

                                                                                                            Bob

Just found this in my inbox, sounds inflationary to me…

China’s Stimulus Spells Trouble for U.S.

This week, Asian markets were initially energized by China’s announcement of a near $600 billion economic stimulus package for its own economy. Although I have never been a fan of government-fueled stimuli, the relative wisdom of the plan hinges on the source of funds the Chinese government decides to utilize. Their best choice would be the country’s nearly $2 trillion in foreign reserves, the largest portion of which is held in U.S. Treasury and agency debt. This pile of dollars, which really amounts to no more than a subsidy for U.S. consumers, does nothing to benefit Chinese citizens.

If it does decide to employ this ocean of cash, China will become a net seller of U.S Treasuries just as the U.S. Government itself will be pushing up its issuance of new Treasury bonds into record territory. With two huge sellers and few major buyers (just about every major creditor nation having problems of their own), the Federal Reserve will become the only reliable customer. As a result, not only will the Fed monetize our own economic stimulus packages, but will be forced to provide the same service to the Chinese.

Most economists feel that China will maintain the status quo by borrowing or printing the funds for their own stimulus while continuing to hoard its trillions of existing U.S. dollars. Most also believe that the Chinese will substantially increase their dollar holdings in order to finance America’s never-ending string of bailouts and its ballooning Federal deficit, which is soon to pass $1 trillion annually. These optimists are in for a rude awakening.

The Chinese cannot follow such a course without unleashing intolerable inflation at home. Selling down their vast reserves of U.S. debt and using the proceeds for domestic infrastructure projects (or anything else for that matter) is a vastly superior stimulus mechanism than "lending" to Americans so we keep "buying" their products. When Chinese authorities finally figure this out the United States will suffer the consequences.

As they have in the past my critics will cavalierly dismiss this view. However, as the following compilation of some of my 2006 and 2007 television appearances attests, my economic predictions have proved extremely prescient:

Click here to watch it on YouTube.

However, given recent global stock market and currency volatility, some are questioning the wisdom of my investment strategy. I am confident that the short-term effects suffered by foreign stocks and currencies as a result of financial de-leveraging and losses on bad U.S. debt will prove temporary. If so, my market forecasts will ultimately prove just as accurate as my economic predictions. Those who are currently patting themselves on the back for having had the apparent foresight to stay in U.S. dollars will be singing a different tune when the music stops playing.

Sincerely,
Peter Schiff
President and Chief Global Strategist
Euro Pacific Capital

Great video from the above post, I laughed out loud when Washington Mutual was selected as a good buy, Peter has been right so far, he even picked Obama as the winner long ago.

He’s an advocate of Ayn Rand’s Philosophy and the Austrian School of Economics so he got a winning combination going for him, and please don’t tell me that Greenspan was following her philosophy while he was running the Fed, it will just show ignorance of her philosophy and Greenspan.

There are a couple requisite events for the very fascinating Ka-Poom theory to take place. The most important being a major revaluing of government debt, and massive capital flight. For the latter we can now beg the question: "Where exactly will capital fly to?"

The reality is that compared to many places America’s investments have been shockingly conservative. Double that with our reputation, and we’ve become the zone capital is flying too, not from.

A major revaluing of US treasuries, is thus, the place to watch for a Ka-Poom reversal from de(disin)flation to even greater inflation. So the question remains: Can the USA finance a $2 trillion dollar deficit? As we muddle through the rest of 2008 and all of 2009, we are going to find out.

Steve

 

 

Yeah, Schiff is good. The man really saw much beyond than any of the talking heads that were put to confront him. Just like Chris Martenson did… That credibility weighs a lot today.

Regarding my earlier mentioning of an extension of the bull market in bonds: I was talking about the bond market as the field for the big players, the ones that can throw their weight around and preempt the Fed open market operations, apply hedging techniques and such, like China; These players basically make their own reality (or at least have a much better chance to do so). The little investors simply get crushed in the volatile environment. So I was talking about the bigger picture, not on the actions of the tiny investors that are just trying to protect themselves.

With respect to the small investor, it seems to me that the risks due to an inflationary outcome after betting on deflation are much worse than the risks due to a deflationary outcome after betting on inflation.

That’s a very interesting point, and probably a very practical way of looking at it for investors who are uncertain how long deflation will last before inflation takes over.

"The Strange Case of Falling International Reserves"

Very interesting article from over at Financial Sense. I still think the chickens will be coming home to roost soon.

http://www.financialsense.com/editorials/salinasprice/2008/1106.html

I think Chris and Mish are right. And I think Schiff will be right.

http://www.3news.co.nz/Video/Business/tabid/369/articleID/78689/cat/41/Default.aspx#video

Bernanke then sold off half of the Fed’s Treasuries. And he traded
Treasuries for toxic waste of poor-quality mortgage-backed securities.
And he encumbered half of the remaining Treasuries with “off balance
sheet” swaps of about $220 billion. (Does this sound like Enron
accounting?) The balance sheet started with $800 billion of mostly
reliable assets and now has about $250 billion of unencumbered
Treasuries.
The biggest source of funding is from the Treasury. Banks are leaving deposits in the Fed now that the Fed is paying interest.
The important conclusion is that the paper dollars are now issued by a
far less soundly structured Fed, an organization that is more
interested in bailing out the financial community than defending the
dollar.
This chart below compares last year’s assets, which were mostly
Treasuries, to this year’s twice-as-large and far more questionable
mix:

The other side of the balance sheet shows that the Fed has borrowed and
taken in deposits to fund the loans that are as big as the issuance of
currency. In effect, the Fed has doubled its footprint and doubled its
responsibilities. Mostly under the covers, they added almost $1
trillion new credit to the financial world in about two months.

There are additional important Fed actions not included in their
balance sheet. For example, they invented a Money Market Investor
Funding Facility (MMIF) to guarantee up to 90% of $600 billion of loans
to that sector. They do this through special-purpose vehicles
established by the private sector (PSPVs). The latest Commercial Paper
Funding Facility (CPFF) started October 27 and has issued $143 billion
so far. These are both in addition to the Asset-Backed Commercial Paper
Money Market Mutual Fund Liquidity Facility initiated September 19. The
programs are beyond keeping up with.

Nothing like this has ever been done before by the Federal Reserve. In
time, the consequences in terms of confidence in the dollar will be bad.

You can see Casey Research did a good job with this…

Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure "It" Doesn’t Happen Here

The conclusion that deflation is always reversible under a fiat money
system follows from basic economic reasoning. A little parable may
prove useful: Today an ounce of gold sells for $300, more or less. Now
suppose that a modern alchemist solves his subject’s oldest problem by
finding a way to produce unlimited amounts of new gold at essentially
no cost. Moreover, his invention is widely publicized and
scientifically verified, and he announces his intention to begin
massive production of gold within days. What would happen to the price
of gold? Presumably, the potentially unlimited supply of cheap gold
would cause the market price of gold to plummet. Indeed, if the market
for gold is to any degree efficient, the price of gold would collapse
immediately after the announcement of the invention, before the
alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars
have value only to the extent that they are strictly limited in supply.
But the U.S. government has a technology, called a printing press (or,
today, its electronic equivalent), that allows it to produce as many
U.S. dollars as it wishes at essentially no cost. By increasing the
number of U.S. dollars in circulation, or even by credibly threatening
to do so, the U.S. government can also reduce the value of a dollar in
terms of goods and services, which is equivalent to raising the prices
in dollars of those goods and services. We conclude that, under a
paper-money system, a determined government can always generate higher
spending and hence positive inflation.

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

 

 

Data from the ground.

I work in downtown anytown USA in the Northwest. We have been ‘sheltered’ (or delayed?) in our housing bust. I drive past the same 'homeless shelter every day in the course of my job, right before lunch is served. In the past 3-4 months the line has doubled. I’ve been keeping a close eye since Chris warned us about this coming our way.

 

The last post introduces the fascinating conflict between the Monetarist and the Austrian views. So Bernanke says that they just print money and everything is cool and the economy gets re-started. That was the prescription tried in Japan, and we know how that one worked. It sure doesn’t look like it is working in the USA presently, maybe they are not printing money fast enough to compensate for all the debts that are being written off? It is a mystery to me at least why Monetarism is lent any credibility, it strikes me more like an ideology promoted by the bank-government alliance to be able to expand credit virtually without limit and to socialize all the state’s debts.

I sympathize with the Classical/Austrian view: capital and money are not the same thing. Flood everything with paper but if the productive capacity is not there, that is counterproductive even, because it hurts the remaining producers even more. Bernanke’s statement sounds more like a recipe for a hyperinflationary depression if the printed money actually reaches the streets. If there are friends of Monetarism out there, please enlighten me why Monetarism is still trusted in light of substantial empirical evidence contradicting its tenets.

  1. Charging "interest" should be illegal.

  2. If charging interest is illegal, then how would I afford anything?

  3. Well, if no one is able or willing to lend you money, then you’ll have to do without until you can afford what it is you intend to purchase.

  4. If a lender decides to charge interest upon a loan he has given and the borrower has defaulted, no one is obligated to bail him out since: a. it’s illegal b. the lender should’ve never loaned it out in the first place.

  5. Don’t have to worry about bailouts anymore.

  6. This is a "pay cash as you purchase" program.

  7. How did we get swindled into a "credit" system in the first place?