Daily Digest

Daily Digest 8/23 - Rising Interest Rates, Rethinking Gold, Cities Selling Municipal Services

Monday, August 23, 2010, 9:57 AM
  • Interest Rates 'May Hit 8%' By 2012 Says Think Tank
  • Rethinking Gold: What if It Isn't a Commodity After All?
  • Housing Fades as a Means to Build Wealth, Analysts Say
  • Stock Swing Still Baffles, With an Ominous Tone
  • Facing Budget Gaps, Cities Sell Parking, Airports, Zoo 
  • Forex Reserves Record Biggest Fall Since November 2008
  • As Floods Go South, Pakistan Races to Keep a City Dry
  • Where Did All The Ocean Plastic Go?

Crash Course DVDShare the Crash Course with your neighbors: gift them a deluxe edition DVD (NTSC or PAL)

Economy

Interest Rates 'May Hit 8%' By 2012 Says Think Tank (Johan V.)

Doctor Lilico says in a research note: "Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation."

The Bank has already pumped £200bn into the economy under quantitative easing to help stimulate demand.

Rethinking Gold: What if It Isn't a Commodity After All? (Rector)

Odd, then, that gold's elevated price hasn't fallen in response to tepid U.S. inflation numbers. The Consumer Price Index as of July pegged inflation at just 1.2% for the previous 12 months, not counting seasonal adjustments. Nor has gold reacted to what Mohamed El-Erian, Pimco's chief executive, recently called "the road to deflation" on which he sees the U.S. traveling.

Housing Fades as a Means to Build Wealth, Analysts Say (jdargis)

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good.

    Crash Course DVDShare the Crash Course with your neighbors: gift them a deluxe edition DVD (NTSC or PAL)

Stock Swing Still Baffles, With an Ominous Tone (jdargis)

To the Nanex analysts, these are crop circles of the financial kind, containing clues to the mystery of what happened in the markets on May 6 and what might have caused the still-unexplained flash crash.

The charts — which are visual representations of bid prices, ask prices, order sizes and other trading activity — are inspiring many theories on Wall Street, some of them based on hard-nosed financial analysis and others of the black-helicopter variety.

Facing Budget Gaps, Cities Sell Parking, Airports, Zoo (jdargis)

Cities and states across the nation are selling and leasing everything from airports to zoos—a fire sale that could help plug budget holes now but worsen their financial woes over the long run.

California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Conn., it's parking meters. In Louisiana and Georgia, airports are up for grabs.

Forex Reserves Record Biggest Fall Since November 2008 (Deepak)

The reserves had fallen $5.02 billion in the week ended November 14, 2008, when overseas investors exited India after the global financial crisis intensified. Foreign currency reserves, including currency reserves, gold, special drawing rights (SDRs) and reserves with IMF, fell to $282.79 billion as on August 13. Foreign currency assets were down $4.48 billion to $256.59 billion, according to the Reserve Bank of India.

Environment

As Floods Go South, Pakistan Races to Keep a City Dry (jdargis)

“The situation is dangerous,” he said. “The water is rising a foot every day and still rising. We will keep struggling.”

Where Did All The Ocean Plastic Go? (jdargis)

A major pollutant, plastics have far reaching environmental impacts in the ocean, including entanglement of marine fauna, particle ingestion by seabirds and other organisms, dispersal of invasive species to non-native waters and the transport of organic contaminants.

Article suggestions for the Daily Digest can be sent to [email protected]. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."

17 Comments

saxplayer00o1's picture
saxplayer00o1
Status: Diamond Member (Offline)
Joined: Jul 30 2009
Posts: 4064
Re: Daily Digest 8/23 - Rising Interest Rates, Rethinking ...

"“Forget the official debt,” he tells Aaron in this clip. The “real” deficit - including non-budgetary items like unfunded liabilities of Medicare, Medicaid, Social Security and the defense budget - is actually $202 trillion, the professor and author calculates; or 15 times the “official" numbers.

“Congress has engaged in Enron accounting,” says Kotlikoff, who recently penned an op-ed for Bloomberg entitled: The U.S. Is Bankrupt and We Don't Even Know It.

Yet, the debt market continues to have an insatiable appetite for U.S. Treasuries; heading into Monday's session, the yield on the 30-year Treasury bond (which moves in opposition to its price) was at its lowest level since April 2009. "

"State is suffering from "structural deficit" and no longer generates enough for all services

ATLANTA - Georgians angered by teacher layoffs, state offices on furlough and jolting tuition increases should prepare for more than five years of the same, warns budget experts, because the state is in the clutches of a structural deficit.

Months after the economy entered recovery mode, state tax collections continued to fall. Only in the last two months have collections bottomed out and begun to rise.

A July report by Georgia State University put the term "structural deficit" on the tongues of legislators and state candidates. Slowly, voters across the state are hearing it, too.

"A structural budget deficit exists if, even in normal economic times, tax and fee revenues are not sufficient to support existing public-service levels, and thus the gap between revenues and expenditures will not 'naturally' close as revenue growth outpaces the growth in expenditure demand," wrote authors Carolyn Bourdeaux and David Sjoquist. "Such a deficit requires long-term policy changes to the revenue structure, as well as changes to the amount, type, or efficiency of public services provided, in order to close the gap."

They concluded the state will come up short $1.5 billion to $2.1 billion during each year well past fiscal year 2015."

"Though many current state workers believe their pension plans are protected from cuts, three states are moving forward with reductions in cost-of-living adjustments. It establishes a precedent that concerns many current and future retirees. Guest host Rachel Martin talks with Keith Brainard, research director for the National Association of State Retirement Administrators, and Stephen Pincus, a Pittsburgh lawyer representing retirees in a legal fight over benefits.

West of I-95, lawmakers and state workers in three states are locked in a debate over public pension funds. At issue: whether a worker's benefits are protected from cuts. Lawmakers in Colorado, Minnesota and South Dakota have passed laws that reduce cost of living increases - increases that were promised to state workers."

"Aug. 23 (Bloomberg) -- The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the Internet bubble, stoking concern fixed-income markets are headed for a fall.

Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.

Concern the global economic recovery is faltering, with the U.S. growing at a slower-than-forecast 2.4 percent pace in the second quarter, is prompting investors to pile into fixed-income securities of all types even with some yields at record lows. The new cash has helped fuel a rally and drove yields on investment-grade U.S. corporate debt down to a record 3.79 percent last week, while two-year U.S. Treasury yields fell to an all-time low of less than 0.5 percent.

The money flowing into bonds is “probably not repeatable on a consistent basis,” said Joel Levington, managing director of corporate credit in New York at Brookfield Investment Management Inc., which oversees $24 billion. “Eventually it won’t be sustainable. Whether that means five years from now or five weeks is a little difficult to tell,” he said. "

"A growing insolvency crisis in workers' compensation insurance, born from years of lax oversight by state regulators, is threatening to leave thousands of small businesses owing $600 million or more to New York insurance pools they trusted to pay claims from workplace death and injury.

Already, the little-publicized crisis has forced otherwise stable companies to lay off workers and curtail hiring plans during a critical point in the state's economic recovery.

And at some point, taxpayers could be forced to pick up the tab for whatever can't be recovered through lawsuits or other means."

  • Other news and headlines:

Housing Slide in US Threatens to Drag Economy Into Recession

Japan's Bonds Fall on Concern Government to Increase Debt Sales

'Our state is $120.6 billion short!' (Illinois)

How States Hide Their Budget Deficits (Opinion..Wall Street Journal)

NG borrowings rise 59% (Philippines)

Bankruptcy looms unless City Council acts soon, interim city manager says (Jackson)

$26 billion unfunded liability won't stall GM IPO, experts say (or use this link)

Three Twin Cities Structures Default On Their Loans, Face Imminent Foreclosures

Ritter to announce how Colorado will bridge $60 million budget gap

Rural hospitals face challenges across the state (Georgia)

Legacy of bad deals strains NJ state finances

State reimbursements to providers continue to shrink (Pennsylvania)

As Wayne County's budget woes percolate, more trouble predicted (Or use this link)

Oil Drillers Look To Plug Tax Talk  ("Extraction levy may ‘devastate’ L.A. industry")

Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar

Modesto out to cut retirement expenses

portals's picture
portals
Status: Member (Offline)
Joined: Apr 20 2009
Posts: 22
Please correct me if I'm wrong!

Over the past couple of years, many economists have speculated on the apparent disconnect between gold and the dollar.   The following article on CM's website is just one example.

Rethinking Gold: What if It Isn't a Commodity After All?

The thing is, gold is, indeed, a commodity.   Like all commodities, supply dictates the final market price, right?  The more of something there is, the less it's value, and this is the key as to why gold has not kept in sync with the value of the dollar.

Since 2008, there has been a concerted effort on the part of gold producers to mine greater volumes of the metal to the tune of many millions of Troy ounces per year.    When the percentage increase in gold supply mirrors the percentage fall of the value of the US dollar, there appears to be a parity between them.  Subsequently, the price of gold 'apparently' remains stagnant at the $1200.00 level.

One cannot use any commodity that is subject to the laws of supply and demand as a means in which to judge the value of another commodity, like the dollar.   If gold had not been mined in such large quantities, would not its price be far greater than it is now in relation to the dollar?  This whole thing seems to be a scam designed to maintain global currency valuations, and hide the fact that all global currencies are currently falling by phenomenal amounts.

Had we used 'moon' rocks as a valuation base instead of gold, every world currency would be in the gutter, as 'moon' rocks cannot be easily expanded, and their value would remain steady.   God help us if anybody takes this step to provide a bona-fide steady state valuation system as, then, we would really see just how far in the pit we really are.

Doug's picture
Doug
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Posts: 3125
Are we heading for hyperinflation???

http://www.zerohedge.com/article/guest-post-how-hyperinflation-will-happen

Quote:

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

Quote:

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—

—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

The rest of his explanation is a bit too complex for my tastes and requires too many variables to fall into place, but whether the scenario is plausible is for greater minds than mine to figure out.  That's why I bring it here.

Doug

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Are we heading for hyperinflation???
Doug wrote:

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

84 years the Fed has debased the currency by 95%.

We know what happened to Rome after 300 years when their dollar went to zip.

So, when the dollar goes to a value of ZERO (looses the remaining 5% purchasing power) what will things cost then? Answer = Hyperinflation. 

earthwise's picture
earthwise
Status: Platinum Member (Offline)
Joined: Aug 10 2009
Posts: 846
Re: Are we heading for hyperinflation???
Doug wrote:

http://www.zerohedge.com/article/guest-post-how-hyperinflation-will-happen

Quote:

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

Quote:

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—

—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

The rest of his explanation is a bit too complex for my tastes and requires too many variables to fall into place, but whether the scenario is plausible is for greater minds than mine to figure out.  That's why I bring it here.

Doug

Great read, Doug.

I find it helpful to see a step-by-step path to whatever end is foreseeable. This clearly spells out a path to hyperinflation. Will it happen? Who knows, but clearly it's easily plausible even in the current deflationary environment. What I found especially illuminating is the distinction between inflation and hyperinflation: hyperinflation is not just inflation on steroids but a currency failure caused by a loss of confidence. A completely different animal.

This is just my rather elementary opinion and, like you, I await the more learned to weigh in. Nonetheless, I found it helpful.

Thanks.

LogansRun's picture
LogansRun
Status: Diamond Member (Offline)
Joined: Mar 18 2009
Posts: 1443
Re: Are we heading for hyperinflation???

Where the heck have you been?!?!?!  Don't just disappear again without at least telling us you're leaving!  Some of the members that have decided to bail on the forums I don't miss.......YOU I do!  (I miss a few others as well but....it's your choice to bail).

Welcome back!  Hope you stay a while!

Davos wrote:
Doug wrote:

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

84 years the Fed has debased the currency by 95%.

We know what happened to Rome after 300 years when their dollar went to zip.

So, when the dollar goes to a value of ZERO (looses the remaining 5% purchasing power) what will things cost then? Answer = Hyperinflation. 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Are we heading for hyperinflation???
LogansRun wrote:

Where the heck have you been?!?!?!  Don't just disappear again without at least telling us you're leaving!  Some of the members that have decided to bail on the forums I don't miss.......YOU I do!  (I miss a few others as well but....it's your choice to bail).

Welcome back!  Hope you stay a while!

Hello LogansRun:

We had to move our kid to college, and I have been getting on the net and able to read only 4 blogs per day. Should be back up to speed soon. Take care.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: Are we heading for hyperinflation???

I wouldn't count on that particular highly contrived scenario happening any further than I could read it without dozing off.  Yes, hyperinflation is possible, but highly difficult under current dynamics. 

In order to have hyperinflation, you need to have money and credit growing faster than the economy.  Right now, money and credit is shrinking faster than the economy.  Growing government debt may add to the money supply, and cause a temporary crystal-meth high that gives good (or at least not-so-bad) economic readings for a short period of time (apparently 2 quarters), but it also adds to the debt overhang, forcing the economy to shrink at an even faster rate, most notably right after the high wears off.

You cannot have hyperinflation, or even run-of-the-mill inflation, when money and credit are shrinking faster than the economy.  It is simply not possible.  What we are in now, which even the article acknowledges, is debt deflation.  Debt deflation will run its course, with or without stimulus, and separate millions of people and entities from their assets (and their debts). 

The more stimulus they add, the more companies and individuals will be taken down the debt spiral, as every dollar of stimulus adds mulitple dollars of future debt payments which must be serviced by an economy that has no additional productivity to show for the additional debt that's been forced upon it in the form of stimulus (I guess that's a more scientific way of saying stimulus dollars are a complete and absolute waste of money). 

 

 

 

Davos's picture
Davos
Status: Diamond Member (Offline)
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Posts: 3620
Re: Are we heading for hyperinflation???
Farmer Brown wrote:

I wouldn't count on that particular highly contrived scenario happening any further than I could read it without dozing off.  Yes, hyperinflation is possible, but highly difficult under current dynamics. 

In order to have hyperinflation, you need to have money and credit growing faster than the economy.  Right now, money and credit is shrinking faster than the economy.  Growing government debt may add to the money supply, and cause a temporary crystal-meth high that gives good (or at least not-so-bad) economic readings for a short period of time (apparently 2 quarters), but it also adds to the debt overhang, forcing the economy to shrink at an even faster rate, most notably right after the high wears off.

You cannot have hyperinflation, or even run-of-the-mill inflation, when money and credit are shrinking faster than the economy.  It is simply not possible.  What we are in now, which even the article acknowledges, is debt deflation.  Debt deflation will run its course, with or without stimulus, and separate millions of people and entities from their assets (and their debts). 

The more stimulus they add, the more companies and individuals will be taken down the debt spiral, as every dollar of stimulus adds mulitple dollars of future debt payments which must be serviced by an economy that has no additional productivity to show for the additional debt that's been forced upon it in the form of stimulus (I guess that's a more scientific way of saying stimulus dollars are a complete and absolute waste of money). 

While on vacation I listened to Sprott, I forget the numbers but he said - if my memory isn't shot - that it was 30 cents on 11 dollars. In other words: 11 bucks of stim equates to .30 cents hitting the economy. I agree 100% with you on asset price destruction, demand destruction bought on by credit destruction. I respectfully don't think hyperinflation is a long shot. I think it is inevitable and that it will be bought on by crushing deficits leading to a dollar that gets destroyed.

LINK, another good read, (I'm not alone on this belief).

I also think the Treasury run could be triggered by a precipitous decline in the value of the dollar. Note this implies the Treasury run would start on the shortest end of the curve, Fed notes of zero duration. Then the longer end would follow.


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DavidC
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Posts: 243
Re: Daily Digest 8/23 - Rising Interest Rates, Rethinking ...

Well, all I can say is Davos, LogansRun and Farmer Brown in one go - a treat!

DavidC

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Southerner
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Joined: Sep 7 2009
Posts: 36
Re: Daily Digest 8/23 - Rising Interest Rates, Rethinking ...

I agree (even though I don't know very much) that the current deflationary spiral could end up in hyperinflation.   Once the masses wake up and lose faith in their FRN's, realize the currency has no value and the commodities of life sharply increase in cost when the masses all want them at the same time of desperation....

Which is why we prepare and educate those who wish to learn, as Ya'll are educating me!  My thanks to the oldtimers.

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earthwise
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Posts: 846
Re: Are we heading for hyperinflation???
Farmer Brown wrote:

I wouldn't count on that particular highly contrived scenario happening any further than I could read it without dozing off.  Yes, hyperinflation is possible, but highly difficult under current dynamics. 

In order to have hyperinflation, you need to have money and credit growing faster than the economy.  Right now, money and credit is shrinking faster than the economy.  Growing government debt may add to the money supply, and cause a temporary crystal-meth high that gives good (or at least not-so-bad) economic readings for a short period of time (apparently 2 quarters), but it also adds to the debt overhang, forcing the economy to shrink at an even faster rate, most notably right after the high wears off.

You cannot have hyperinflation, or even run-of-the-mill inflation, when money and credit are shrinking faster than the economy.  It is simply not possible.  What we are in now, which even the article acknowledges, is debt deflation.  Debt deflation will run its course, with or without stimulus, and separate millions of people and entities from their assets (and their debts). 

The more stimulus they add, the more companies and individuals will be taken down the debt spiral, as every dollar of stimulus adds mulitple dollars of future debt payments which must be serviced by an economy that has no additional productivity to show for the additional debt that's been forced upon it in the form of stimulus (I guess that's a more scientific way of saying stimulus dollars are a complete and absolute waste of money). 

 

 

 

FB,

Your arguement is persuasive against money supply type inflation but I think the point of the article was that there is a possibilty of hyperinflation caused by a currency collapse in leiu of  the traditional 'increase of money supply' type of inflation. This link  Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar that Saxplayer posted today makes a similar point that hyperinflation can be triggered by collapse of the currency through bond purchases. What am I (and they) missing?

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Re: Please correct me if I'm wrong!
portals, post 2 wrote:

  One cannot use any commodity that is subject to the laws of supply and demand as a means in which to judge the value of another commodity, like the dollar.   If gold had not been mined in such large quantities, would not its price be far greater than it is now in relation to the dollar?  This whole thing seems to be a scam designed to maintain global currency valuations, and hide the fact that all global currencies are currently falling by phenomenal amounts. far in the pit we really are. 

The big difference is that gold is very hard to mine.  Unlimited Dollars are available with a few keystrokes at the Fed. Which one seesm a safer store of value on this basis?  The big rise in gold's price is showing the fall in value of global currencies.  A few weeks ago gold set a new high against the dollar and the Euro. 

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: Are we heading for hyperinflation???
earthwise wrote:
Farmer Brown wrote:

I wouldn't count on that particular highly contrived scenario happening any further than I could read it without dozing off.  Yes, hyperinflation is possible, but highly difficult under current dynamics. 

In order to have hyperinflation, you need to have money and credit growing faster than the economy.  Right now, money and credit is shrinking faster than the economy.  Growing government debt may add to the money supply, and cause a temporary crystal-meth high that gives good (or at least not-so-bad) economic readings for a short period of time (apparently 2 quarters), but it also adds to the debt overhang, forcing the economy to shrink at an even faster rate, most notably right after the high wears off.

You cannot have hyperinflation, or even run-of-the-mill inflation, when money and credit are shrinking faster than the economy.  It is simply not possible.  What we are in now, which even the article acknowledges, is debt deflation.  Debt deflation will run its course, with or without stimulus, and separate millions of people and entities from their assets (and their debts). 

The more stimulus they add, the more companies and individuals will be taken down the debt spiral, as every dollar of stimulus adds mulitple dollars of future debt payments which must be serviced by an economy that has no additional productivity to show for the additional debt that's been forced upon it in the form of stimulus (I guess that's a more scientific way of saying stimulus dollars are a complete and absolute waste of money). 

FB,

Your arguement is persuasive against money supply type inflation but I think the point of the article was that there is a possibilty of hyperinflation caused by a currency collapse in leiu of  the traditional 'increase of money supply' type of inflation. This link  Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar that Saxplayer posted today makes a similar point that hyperinflation can be triggered by collapse of the currency through bond purchases. What am I (and they) missing?

What the inflationists are missing is primarilly that credit is being destroyed faster than QE is adding money back into the system.  Secondly, they are missing that US consumers, for the first time in decades, are saving/paying off debt rather than borrowing. The first makes inlfation impossible, much to the horror of  Uncle Benny Bubbles.  The second is the beginning of what would eventually make a bond-triggered currency crisis very difficult to fathom.  As the US consumes less and more dollars stay at home, more domestic dollars will wind up in US Treasuries, and less will be expected of foreigners to purchase. 

Just to be clear:  I do believe inflation and hyperinflation are eventually possible (and likely), but that's a long ways off the way I see things.  We just disagree on the timing (by a lot!)Surprised

Jager06's picture
Jager06
Status: Gold Member (Offline)
Joined: Dec 2 2009
Posts: 395
Re: Are we heading for hyperinflation???

Hyperinflation could be a result of money velocity, not quantity in circulation. The result of the velocity increase would be a requirement for more cash in circulation. Being almost completely debt free, I find it difficult to believe that my neighbors and friends who are trying as hard as they can to be debt free also, will suddenly pick up the credit cards and go wild again. Not even remotely likely anymore, not without some sort of impetus on the larger supply of necessary goods. Everyone I know pays with cash, and if they don't have cash, it does not get purchased.

I can clearly see the downturn coming in the next 90 to 180 days, so rather than lay someone off, I am going to do more with less until the worst is over (not hire). That also influenced my decision to put off equipment purchases and other large capital exenditures. I know the end result is deflationary for now. A spike in the price of a commodity could be all it takes to light the velocity fire on Wall St and Main St. I can think of a few things that could start a flight from bonds on Wall St. I can see the annualized increase of food at 30%+ currently, being more affected by the projected shortfalls of wheat and the egg recall, maybe one more black swan to the party in foodstuffs. Once the mask is off of the "Recovery" I can see people very quickly pulling out their credit cards to load up on staples, suddenly and massively increasing velocity.

I am beginning to see the current situation more in terms of a medical diagnosis, with a set of symptoms, that are changing with the advancement of the disease. Unfortunately it is looking more and more likely that there are multiple infections affecting the patient, in addition to the addiction and the damage from the motorcycle crash.....(or high diving accident?)

 

Jager

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Are we heading for hyperinflation???
Farmer Brown wrote:

What the inflationists are missing is primarilly that credit is being destroyed faster than QE is adding money back into the system.  Secondly, they are missing that US consumers, for the first time in decades, are saving/paying off debt rather than borrowing. The first makes inlfation impossible, much to the horror of  Uncle Benny Bubbles.  The second is the beginning of what would eventually make a bond-triggered currency crisis very difficult to fathom.  As the US consumes less and more dollars stay at home, more domestic dollars will wind up in US Treasuries, and less will be expected of foreigners to purchase. 

Just to be clear:  I do believe inflation and hyperinflation are eventually possible (and likely), but that's a long ways off the way I see things.  We just disagree on the timing (by a lot!)Surprised

With all respect: I'm not sure I'd agree. The 700 billion is bogus. I've seen estimates from 10-24+ trillion. What I'm driving at is the "Fed" is backstopping every failure and doing it @ss backwards.

In other words, they could have injected a bailout to the 1.5 trillion subprime losses by giving those who were failing mortgage money. I'm not saying that is right, I am saying if you are going to do a bailout then don't fight the current. Put the money in the water so it flows into the economy. This would have stopped the 1.5 trillion in losses in the prime sector. They didn't do this. Now they are backstopping every failure. Freddie, Fannie, you name it.

I think if we look hard we will see money getting wiped out in some sector (RE and CRE) and getting added back in 10 fold in the sector that was equally responsible for blowing up the economy with these @ssinine loans/instruments.

If they weren't backstopping every failure then I'd be in agreement.

Another thing that I don't know if you are taking into account is the deficit. Specifically that we can't take in enough in revenues plus borrowing so Bernanke has to counterfeit (please read: use QE) to pay our tab and avoid default. As far as I'm concerned that is an admission to failure/insolvency. Once people wake up to it (like they did real estate) Uncle Buck and Turbo Timmy's bonds are going to be worthless.

Take care

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Are we heading for hyperinflation???

[quote=Davos

With all respect: I'm not sure I'd agree. The 700 billion is bogus. I've seen estimates from 10-24+ trillion. What I'm driving at is the "Fed" is backstopping every failure and doing it @ss backwards.

In other words, they could have injected a bailout to the 1.5 trillion subprime losses by giving those who were failing mortgage money. I'm not saying that is right, I am saying if you are going to do a bailout then don't fight the current. Put the money in the water so it flows into the economy. This would have stopped the 1.5 trillion in losses in the prime sector. They didn't do this. Now they are backstopping every failure. Freddie, Fannie, you name it.

<SNIP>

"Enron Accounting" Has Bankrupted America:
http://www.informationclearinghouse.info/article26242.htm

U.S. Deficit Really $202 Trillion, Kotlikoff Says

By Peter Gorenstein

August 25, 2010 "Yahoo Finance" -- The Congressional Budget Office (CBO) forecasts the U.S. budget deficit will hit $1.3 trillion this year. An astronomical figure, to be sure, but that’s lower than was projected in March. It’s also less than last year’s record $1.41 trillion deficit, which was close to 10% of GDP.

And, that's the good news.

As the deficit grows so does the national debt, which is currently more than $13.3 trillion, according to official figures.

But the situation is actually much, much worse, according to Boston University economics professor Laurence Kotlikoff.

“Forget the official debt,” he tells Aaron in this clip. The “real” deficit - including non-budgetary items like unfunded liabilities of Medicare, Medicaid, Social Security and the defense budget - is actually $202 trillion, the professor and author calculates; or 15 times the “official" numbers.

“Congress has engaged in Enron accounting,” says Kotlikoff, who recently penned an op-ed for Bloomberg entitled: The U.S. Is Bankrupt and We Don't Even Know It.

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