The Politics of Experience - Inflation/Deflation Debate Revisted

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ashvinp
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The Politics of Experience - Inflation/Deflation Debate Revisted

I just came across this article by Charles Hugh Smith, who argues that the financial power elites will push the government towards policies that support deflation or mild inflation, rather than hyperinflation - http://www.oftwominds.com/blogjuly10/deflation-hyperinflation-07-10.html

CHS basically argues that inflation is good for debtors, who can use devalued dollars to pay back fixed debts, while the holders of debt will see huge losses in the value of those "assets". The top 1% of our population hold a disproportionate share of cash and other liquid assets (short-term treasuries, stocks, etc.) that can be sold for cash, which will increase in value during a deflation. Therefore, the financial power elites who control the government and Fed are more likely to push for deflation rather than inflation.

Charles Hugh Smith wrote:

So who benefits from inflation? Debtors. Who suffers dramatic losses? The owners of debt/cash. And who owes trillions of dollars in debt? the Federal and local governments, of course, and the average American household owing a mortgage, student loans, auto loans and credit card debt.

Who is sitting on $8 trillion in cash? Some insurance companies, mutual funds and pension funds--so-called institutional investors--are sitting on piles of cash, but a significant chunk of the cash is owned by the top 1% of households who own the vast majority of all assets--liquid and fixed--in the U.S.

I would also add that the financial power elites have successfully transferred significant amounts of bad debt to taxpayers. while charging us interest to borrow the money to buy this toxic debt (http://www.zerohedge.com/article/guest-post-fed-funding-treasury-through-banks), and will most likely continue to operate this scheme as long as they are at the levers of power. This ability to pass off bad debts will lessen the blow to major debt holders when a debt deflation hits.

At first, this seemed to be in direct conflict to CM's argument that "Deflation is not on the Menu" - http://www.peakprosperity.com/blog/deflation-not-menu/38481 - however I think there is some overlap when it comes to an argument for policies that support mild inflation. The government and Fed may overplay their hands under these policies and actually create hyperinflation. Other than that small overlap, it seems that there are really good arguments on both sides of this debate which really boils down to the politics of experience - who controls the government and what benefits these people the most?

I'd love to hear what other people think of the arguments on either side of this discussion, and whether there are any other points that can be added to either side.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

Well, there are 250 million weapons in the hands of the masses (surfs). I would worry about this more than the elite 1%. Everything is a numbers game and, well, Inflation, until things are managed. Build out an Electrical Infrastructure, Mass Transit, and all that JAZZ. Everyone works, go to a flat tax and take care of the Nations business. Surely our debtors don't want to lose everything by our defaulting. Business is business, better to have something than nothing at all. As a Nation we have done our part to export goodwill, and export our ugly. Time we get ugly while we can. I would hate to have a rusting Military while the developing nations build the new modern. Hey, not a War monger but use it or lose it, we can't turn this economy or our entititlements around, EVER. so got to do what you got to do. I certainly don't want to start selling the New Jersey turnpike, Grand Canyon, Yellowstone or any other things to a country that effect my perceived freedoms. This beast is out of control and I have no clear view of my compass any more. Sorry.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

I have to re-visit my answer a bit, please forgive me. Say we Deflate some more, it too gets out of hand. We destroy further the middle class and under class. The rich end up with all the toys, and then some. Before we get to that we remind daily the large middle class and poor how you get screwed big time by the money who have to only control 100 senators. Before the lower classes lose all destruction of their remaining equity in housing, we detroy their entititlemens that they watched their whole lifetimes being deducted from their pay checks. In addition to that the moral hazard still has a strong pull on society as a whole and the 401k's, 403 B, set aside and matched so that retirement and an easier older age gets taken out at 25% plus 10% penalty because, yeh, morale hazard. Got to pay your mortgage because it's the right thing to do. Add all this up and this country is not true to its creed, values, and morality for a long time. Like I said, I have no idea where my compass is pointing anymore. I just know things are building to a quick and violent outcome if this continues to be our every day life. Something BIG is going to happen and we all feel it. Just can;t put our fingers on it. Just don't let the lights go out or we are in trouble. The riots of the 60's were horrible, the baby's that were fired on at Kent State back in the day will fill our TV screens rather than this damn oil spill. Something needs to be done, and I for one want the grown ups to start leading. It is way over due if you ask me.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

Ashvinp,

I think it is difficult to accurately determine what the richest 1% is invested in. I know Dr. M thinks that the big boys will benefit from inflation and not deflation, but history seems to refute this in my opinion, as it is obvious that they have benefited in both situations in the recent and distant past.

I think its important to recognize that inflation and deflation (in a non-theoretical context) are really just trades, and that economic effects are secondary to the market effects of these trades. In the sense that the big/smart money is typically engaged in a contrarian investing approach, the scenario that CHS describes seems to fit. 

Best....Jeff

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Re: The Politics of Experience - Inflation/Deflation Debate ...

Just took another read of CHS's article, and I have to say that its the best piece that I have read in a long time. The guy never ceases to offer a different perspective and to shed new light on established beliefs. Its time that I make a donation to his effort.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

Quote:
it is in the interests of the Power Elite to buy Treasury bonds once interest rates rise. The last thing the Financial Plutocracy would want is to see its trillions of dollars in Treasuries diminished via inflation.

I don't understand his argument. If interest rates rise, why would you buy bonds? Yeah, you are getting yield, but aren't you losing out on the lower price of the bond? Although not being a financial whiz, I don't know what the yield vs. bond ratio is, e.g., a 10-year yield goes from 3 to 5%, what would the bond price look like?

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Re: The Politics of Experience - Inflation/Deflation Debate ...

I would also add another point addressing the argument that a debt deflation will be bad for creditors, since they will have to write off billions or trillions in loans. The fact of the matter is that many of these losses have already been passed to taxpayers and the banks have stopped lending to consumers and small businesses (http://www.zerohedge.com/article/consumer-credit-plunges-may-april-revised-much-lower-government-only-marginal-lender-two-mon) and only the government, and thus the taxpayers, are lending out money anymore directly or indirectly through guarantees. Banks are obviously still lending to governments, but this is just a way to further hold financial leverage over government institutions and transfer more money out of taxpayers' pockets.

http://www.oftwominds.com/blogjuly10/con-of-decade07-10.html, http://www.oftwominds.com/blogjuly10/con-of-decade-pt2-07-10.html

There is also the fact that many bank loans are secured by hard assets or can be secured from other income flows of debtors, especially when thoroughly controlled government institutions are willing to bend the rule of law to help banks get paid back on debts.(http://minnesotaindependent.com/60122/the-return-of-debtors-prisons)

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Re: The Politics of Experience - Inflation/Deflation Debate ...

joemanc wrote:

Quote:
it is in the interests of the Power Elite to buy Treasury bonds once interest rates rise. The last thing the Financial Plutocracy would want is to see its trillions of dollars in Treasuries diminished via inflation.

I don't understand his argument. If interest rates rise, why would you buy bonds? Yeah, you are getting yield, but aren't you losing out on the lower price of the bond? Although not being a financial whiz, I don't know what the yield vs. bond ratio is, e.g., a 10-year yield goes from 3 to 5%, what would the bond price look like?

My understanding is that since banking elites have bought up trillions in treasuries via the Fed's ZIRP shell game (borrow at 0% from the Fed and lend to taxpayers at a higher rate), it would be in their interest to continue financing treasury deficits so that interest rates don't spiral out of control and inflate away the value of the government debt they hold. This also gives them the opportunity to continue looting money from taxpayers while we suffer austerity measures (less spending, higher taxes) to fund their relatively higher interest payments.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

Interesting perspective in this article.  It mirrors what Steve Two Beers mentioned in a daily digest comment a few days back (I think July 7th?) when we were discussing Stoneleigh:

"Off the air when i was talking with denninger he told me not to look at the numbers but to look at whom has the power. the banking system was so powerful in 2008 it was able to push through taxpayer bailouts on its behalf through our government, whether it was $700B or $10T it doesn't matter they still accomlished the task. The banking system stioll holds the strings in 2010 and now that they have succesfully transferred the debt payments to the other side of the ledger (taxpayer) they need only for the government to enforce the debts. if they accomplish this task as well.... then we are looking at an event that is highly deflationary."

It seems that over the centuries inflation helps the elite as they have access to the capital first before it creates the inflation.  However, as the masses get super leveraged I imagine their is a tipping point where they feel their edge is being negated by their interest income not keeping up with inflation - - -and perhaps thats the point when they set up for/hope for deflation.  Now that the government holds the bag of loans, why not right?

That said, I dont think the elites are all getting together in a meeting to decide this.  I think the more likely scenario is that they all act to preserve/increase their wealth individually and overall that leads to X policy/push.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

rickets wrote:

That said, I dont think the elites are all getting together in a meeting to decide this.  I think the more likely scenario is that they all act to preserve/increase their wealth individually and overall that leads to X policy/push.

+1 Precisely, politics and trading are a function of the profit conspiracy....aka greed.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

JAG wrote:

rickets wrote:

That said, I dont think the elites are all getting together in a meeting to decide this.  I think the more likely scenario is that they all act to preserve/increase their wealth individually and overall that leads to X policy/push.

+1 Precisely, politics and trading are a function of the profit conspiracy....aka greed.

I agree that power elites probably do not get together in some kind of biannual conference to discuss these policies (leaving aside the meetings of the trilateral commission, bilderbergs, CFR, etc.), but I think there is certainly more coordination, explicit or implicit, than just wealthy individuals making unilateral decisions about how to lobby the government. Politicians, regulators, big corporate executives, powerful lobbies, institutional academics, owners of MSM outlets... all these groups have formed an increasingly large revolving door of implicit corruption. The key decision makers all know that if they don't play by the rules of the game (namely attending to the demands of financial elites), they will be quickly marginalized or replaced.

For example, there is considerable evidence that Goldman Sachs' executives were given inside information from the NY Fed about the bailout of AIG before this information became publicly known, so it could dump billions in CDS for a significant profit knowing that these contracts would not be triggered. http://www.zerohedge.com/article/some-insights-david-viniars-grilling-brooksley-born-firms-double-profit-aig

I suspect this type of back and forth exchange happens often, especially recently when the stakes have become so high for all groups involved.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

ashvinp wrote:

joemanc wrote:

Quote:
it is in the interests of the Power Elite to buy Treasury bonds once interest rates rise. The last thing the Financial Plutocracy would want is to see its trillions of dollars in Treasuries diminished via inflation.

I don't understand his argument. If interest rates rise, why would you buy bonds? Yeah, you are getting yield, but aren't you losing out on the lower price of the bond? Although not being a financial whiz, I don't know what the yield vs. bond ratio is, e.g., a 10-year yield goes from 3 to 5%, what would the bond price look like?

My understanding is that since banking elites have bought up trillions in treasuries via the Fed's ZIRP shell game (borrow at 0% from the Fed and lend to taxpayers at a higher rate), it would be in their interest to continue financing treasury deficits so that interest rates don't spiral out of control and inflate away the value of the government debt they hold. This also gives them the opportunity to continue looting money from taxpayers while we suffer austerity measures (less spending, higher taxes) to fund their relatively higher interest payments.

Well apparently another reader asked CHS the same question and here is his answer:

Charles Hugh Smith wrote:
An astute reader asked why the Financial Power Elites I described in The Con of the Decade Part I and The Con of the Decade Part II would encourage rates to rise, as any increase in yield would decrease the market value of the bonds they already hold. Excellent question, and I reckon the answer is that the Power Elites (and perhaps China as well) are selling longer-term Treasuries and other bonds and buying only short-term debt. Since you can hold a six-month T-Bill to maturity, then increases in yields will have little adverse effect on one's capital.

Only those foolish enough to see no risk going forward--those who hold 5-year or longer bonds--will suffer huge losses in the value of their bonds as rates rise.

Once rates have risen--I would guess to the 7-8% yield on short-term bonds and much higher on long-term--then the financial Elites will move their trillions into the long end. Once that move is complete, then rates can be allowed to fall.

This article is another good financial analysis and focuses on why you don't necessarily need threats of inflation for bond yields to rise - http://www.oftwominds.com/blogjuly10/bonds-inflation-risk07-10.html

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Re: The Politics of Experience - Inflation/Deflation Debate ...

Could it be that we have two opposing forces at work?  You could say that there is a war of dominance for the "soul" of the nation. 

The first camp would be the deflation camp lead by the economic elite.  Their focus, as stated in the discussions, it to plunder the country and her people so they can increase their wealth.  Their intent is to ensure deflation occurs so their profits can continue.

The second camp is the current government elite that also have domination in mind.  If you follow Glenn, his current depiction of the administration is a Progressive revolutionary one with strong ties to Marxism.  Their intent is to collapse the system from within and install socialism or Marxism.  The initial shots of the war were their attempts are to use the economic crisis to gain advantage over the economic elite.  This enables them to start the takeover of industry and increased reliance on entitlements.  Not letting a good crisis waste away, they will use the environmental crisis in the Gulf to push thru the Cap and Tax legislation.  Should the midterm elections turn out poorly and their "peaceful" agenda is not realized, they will resort to an economic attack through the Fed.  The Fed will continue with the quantitative easing, flooding the market with cash and introducing inflation and eventually hyper inflation.  When the masses riot because of a lack of essential services, they will take control of the country through martial law (for our own good). 

Which one will win is another question but my bets are on the administration.  The truly wild card that I don’t think they anticipated is the Tea Party Movement and the push for a return to the Constituion.  God, I pray that we can stop both and return this country to greatness.

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Re: The Politics of Experience - Inflation/Deflation Debate ...

CPT_Kay wrote:

Could it be that we have two opposing forces at work?  You could say that there is a war of dominance for the "soul" of the nation. 

The first camp would be the deflation camp lead by the economic elite.  Their focus, as stated in the discussions, it to plunder the country and her people so they can increase their wealth.  Their intent is to ensure deflation occurs so their profits can continue.

The second camp is the current government elite that also have domination in mind.  If you follow Glenn, his current depiction of the administration is a Progressive revolutionary one with strong ties to Marxism.  Their intent is to collapse the system from within and install socialism or Marxism. 

The point is that there aren't two opposing forces, just one corpotocracy instituting policies that benefit the top 1% of the population. If the administration is aiming to socialize corporate profits at the expense of the corporate elites, then they are doing a horrible job. Unfortunately, influential media pundits like Beck don't understand the meaning of socialism or Marxism.

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