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Deflation still winning the day

Tuesday, November 11, 2008, 11:04 AM

As fast as the Federal Reserve and US government have shoveled money into the Wall Street machinery, it has been disappearing even faster.

The evidence is contained in the falling prices of:

  • Houses
  • Stocks
  • Most bonds
  • Commodities
  • A rising dollar

The problem with deflation is that it is a certified bummer.  Falling asset prices mean a negative "wealth effect," which depresses both additional borrowing and spending by consumers.  Less consumer spending means falling revenues and falling profits, and then falling employment.

Fewer workers means less spending, which just creates the conditions for fewer workers.  And so it goes.

Right now we should probably admit to ourselves that entrusting the bailout to a deep-cover Wall Street insider was a bad idea.  At the very least, we should admit that the steps taken so far are not working.

I mean, just look at these articles:

GM's Skid Quickens as Crunch Raises Bankruptcy Threat
Only federal aid can prevent a collapse of the biggest U.S. automaker, analysts including Buckingham Research Group's Joseph Amaturo said before the shares tumbled today for a fifth straight day. Reorganizing in court protection also may not be possible, because the credit crunch has dried up financing.

"Strategic bankruptcy is not an option for GM,'' said Mark Oline, a credit analyst with Fitch Inc. in Chicago. "This is an issue of operating or not operating.''

The prospect of a forced liquidation raises the stakes for GM's quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year's end. GM had $16.2 billion on hand as of Sept. 30, down from $21 billion at the end of June, and needs $11 billion to pay its monthly bills.

"A bankruptcy wouldn't address our immediate liquidity concerns,'' said Renee Rashid-Merem, a spokeswoman for Detroit- based GM. "It's not an option for GM because it creates more problems than it solves.''

Postal Service Looks To Cut 40,000 Jobs In First Layoff In History
SHREVEPORT, LA (KSLA) - "We lost 2 billion dollars and like any other business we have to stay afloat." And to keep from sinking, the United States Postal Service is considering cutting thousands of jobs nationwide. Lavelle Pepper with the post office in Shreveport says they too are feeling the affects of the same disease hitting the country... a struggling economy. "We employ about 685,000 people. If we do layoffs it would include clerks, carriers, mail handlers across all crafts."

Pepper says the postal service is looking to eliminate 40,000 jobs nationwide.

Mall Owner Is Warning of Default
Ailing mall owner General Growth Properties Inc. warned Monday in a government filing that its failure to refinance or extend $1 billion in debt due this month could trigger default on billions of dollars in debt and its ability to continue operations would be in "substantial doubt."

And so on and so forth.

The government bailouts are now being applied to the banking industry, the financial services industry, the insurance industry , the auto industry, and probably soon the mall industry.

But all the bailouts can do is keep an ailing company afloat for a while longer; it cannot fix the problem, which is that the vaunted US consumer has finally run out of steam.

Her's a very interesting post by djhester1940 in a very interesting forum thread (link) on this site asking for anecdotes from the retail side of things:

Last night I was speaking to a neighbor who is a mechanic for a large Ford dealer here in San Antonio. He told me that the normal sales volume for new cars was around 200 cars per month and somewhere in the neighborhood of 400 used cars per month. Last month, October, they sold a total of five cars. To me this sounds serious.

Hmmmm...from 600 cars to 5 cars.  Yes, I would say that qualifies as "serious".

I am collecting other anecdotes from the retail space, which are all confirming the most aggressive slow-down in activity in anybody's experience.

If you have any anecdotes to share, please post them over in the forum.  I find tremendous value in the "on the ground" data, because I am sure it paints a more useful picture than the high-level official data.

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82 Comments

switters's picture
switters
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Re: Deflation still winning the day

Chris,

I know you don't have a crystal ball, but the hot question around here and elsewhere on the Internet seems to be "how long will deflation continue until inflation wins out?"  

I think I recall in your last Martenson Report that you said something like 6-12 months, but I could have misinterpreted.

What are the chances of a ten-year, Japan-style period of deflation in the US?  What's your best guess for how long deflation might last?

switters's picture
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Re: Deflation still winning the day
EDIT: somehow the above comment was posted twice. Move along, move along... nothing to see here.
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Re: Deflation still winning the day

With all respect to Chis, there is no way inflation takes over in 6-12 months.  

In order to believe that you would need to believe that you would need to believe:

 

  • The economy will rebound
  • The unemployment rate will fall - significantly
  • Consumer confidence will be restored
  • Housing prices will stop sliding (remember, still another 4+ years to go there...)
  • Wall Street and corporations will unwind their toxic assets
We could go on, theres dozens of other preconditions that together will signal inflation.  What are the odds of that happening within the year?  Zero, zip, zilch, nada.  In fact, the Fed's actions are having the exact opposite effect - they are helping to prolong this deflationary period by propping up failing banks, the home market, and now the auto businesses. 
 
Mish had a good graph yesterday on why all the people pointing at the gigantic increases in money supply do not understand what they are talking about.  Worth a read.

 

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Re: Deflation still winning the day

I'm reading Mish's notes on deflation and, as he himself points out, they are in stark contrast to Peter Schif's.

I'm not done processing the information, but yes, I'd say now is deflation, I'm not certain Mish is correct in ruling out inflation quite so fast... 

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Re: Deflation still winning the day

GM is tanking because no one is buying cars. So we bail them out. Still no one will be buying cars. I don't see what this gains us.

How about the government tells GM they will buy (bailout money) worth of electric or plug-in hybrid cars. Or solar panels, or windmills, or something that will do us some good.

switters's picture
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Re: Deflation still winning the day
[quote=jgreco]

With all respect to Chis, there is no way inflation takes over in 6-12 months.  

In order to believe that you would need to believe that you would need to believe:

 

  • The economy will rebound
  • The unemployment rate will fall - significantly
  • Consumer confidence will be restored
  • Housing prices will stop sliding (remember, still another 4+ years to go there...)
  • Wall Street and corporations will unwind their toxic assets
We could go on, theres dozens of other preconditions that together will signal inflation.  What are the odds of that happening within the year?  Zero, zip, zilch, nada.  In fact, the Fed's actions are having the exact opposite effect - they are helping to prolong this deflationary period by propping up failing banks, the home market, and now the auto businesses. 
 
Mish had a good graph yesterday on why all the people pointing at the gigantic increases in money supply do not understand what they are talking about.  Worth a read.

 

[/quote]

I read Mish's blog regularly.  I also read many other blogs published by people who believe inflation will win out in the relatively near future.  Frankly, Mish's arguments are more convincing and that's why I'm here asking this question.

Sounds like you think deflation will last several years (i.e. more than five), correct?

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Re: Deflation still winning the day
According to Peter Schiff, once people start fleeing the dollar, that's when inflation, rather hyperinflation will begin. It's hard to time it. Look how fast things happened in Iceland. Once it happens, head for the exits.
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Re: Deflation still winning the day

People thought the Great Depression was just going to be a recession that lasted a year.  The Japanese lost a decade battling deflation.  Hard to judge these things when we are just beginning them, but in general, I'm a believer in a long-term depression.  

Deflation can't be over until housing prices stop falling.  No amount of Government intervention, lender forgiveness,or monetary printing is going to stop them from returning to their historical averages.    Based on the 8 year runnup from 1998 to early 2006 that means we have another 5+ years to go.  After that...it's too early to judge...the Japanese entered a deflationary period with savings, we didn't. 

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Re: Deflation still winning the day
If deflation lasts a while, what are good strategies to hedge?  Are there any good strategies for a deflationary environment?
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Re: Deflation still winning the day

Chris, I am suprised you have fallen into the trap of believing inflation or deflation is actually measured by rising or falling prices.

In order to declare whether deflation is winning then we need  confirmation that the actual money supply has firmly turned negative. If it hasn't then there is every chance these falling prices will turn around, possibly very quickly.

Please review these charts of reconstructed M3 that includes recent Fed activities and the monetary base M0 (narrow money) 

http://www.nowandfutures.com/images/m3b_with_taf_etc.png

http://research.stlouisfed.org/fred2/data/BASE_Max_630_378.png

mred's picture
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Re: Deflation still winning the day
No.  You can have an inflationary environment because of an imploding currency without any of the conditions that jgreco listed being met. For an example, look at Iceland.
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Re: Deflation still winning the day

A friend of mine is a server at a restaurant, good location, average ticket perhaps $20.  Restaurant has been there for 20 years.  Average saturday night take used to be about $6000.  Now it's around $3500.

 

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Re: Deflation still winning the day

I read Mish's insights but also a variey of others.  Have a look around iTulip and Ka-Poom Theory regarding inflation/deflation debate.

No Deflation, Disinflation then lots of Inflation.  This one goes back to 2006 but, there are quite a number of threads on how it won't be a return to the Great depression (straight up deflation).

http://www.itulip.com/forums/showthread.php?t=417

 

 

 

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Re: Deflation still winning the day
You aren't seriously comparing Iceland, a tiny island nation who took on debts over 10x it's GDP, to the United States with the world's reserve currency...  
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Re: Deflation still winning the day

Gov't launches new loan aid effort

Government, mortgage industry announce assistance effort for Fannie Mae, Freddie Mac loans

http://biz.yahoo.com/ap/081111/meltdown_mortgages.html

 

Do you think this will help. If that is true the banks will "help" ~1 million homeowners to not default. AFAIK the total foreclosures for 2007 were ~1.2 million, so this seems like a big chunk.

Or it is too late ?

What is the change in the banks balance sheets if some home-loans are not in foreclosure but instead renegoriated on lower payments ??

 

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Re: Deflation still winning the day
Yes jgreco, an implosion of the US dollar is, as judged by fundamentals, inevitable. The only reason it may not happen has nothing to do with reserve currency status or any economic arguments, but with the US's ability to coerce, due to its possession of all the guns and all the nukes. Ultimately that is what lends value to the dollar.
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Re: Deflation still winning the day
Maybe someone alreday wrote this but hyperinflation, "Weimar style", occurs when the goverment is broke. Then it starts to print money and that is the end of that countrys currency. Mabye USD will stand some Bernanke printing but just for a breif period.
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Re: Deflation still winning the day
[quote=jgreco]

People thought the Great Depression was just going to be a recession that lasted a year.  The Japanese lost a decade battling deflation.  Hard to judge these things when we are just beginning them, but in general, I'm a believer in a long-term depression.  

Deflation can't be over until housing prices stop falling.  No amount of Government intervention, lender forgiveness,or monetary printing is going to stop them from returning to their historical averages.    Based on the 8 year runnup from 1998 to early 2006 that means we have another 5+ years to go.  After that...it's too early to judge...the Japanese entered a deflationary period with savings, we didn't. 

[/quote]

I've seen many predictions for a bottom in the housing market closer to 2012.  Median prices in California are already down 40%+.  There's nothing to say that the collapse will take the same number of years as the run-up.  It's happening a lot faster right now.

What about Iceland?  They're experiencing inflation and a currency collapse in the midst of still declining real estate values, rising unemployment, decreasing consumer confidence, etc.  I'm not comparing Iceland and the US directly, just saying that this is an example that contradicts what you said above about certain factors needing to be in place for inflation to occur.

mred's picture
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Re: Deflation still winning the day
[quote=jgreco]

People thought the Great Depression was just going to be a recession that lasted a year.  The Japanese lost a decade battling deflation.  Hard to judge these things when we are just beginning them, but in general, I'm a believer in a long-term depression.  

Deflation can't be over until housing prices stop falling.  No amount of Government intervention, lender forgiveness,or monetary printing is going to stop them from returning to their historical averages.    Based on the 8 year runnup from 1998 to early 2006 that means we have another 5+ years to go.  After that...it's too early to judge...the Japanese entered a deflationary period with savings, we didn't. 

[/quote]

By the way, despite the argument we are carrying on on the strength/weakeness of the dollar. I will agree with you that the deflationary environment is what we have ahead of us. We will continue to have a bull market in bonds. A reversal in the interest rate trend will wipe out the (paper) capital that the banks are trying to accumulate. Banks don't need to lend, they just make more money in bonds. A prolongation of the bull market in bonds is also the intent of the large bond speculators some of which are the biggest international banks and their owners. That is their will, so that is what will happen. This is a carbon copy of the situation during the Great Depression.The same trend in interest rates will wipe out the capital of the productive sector, this is, after all the source of the real capital accumulated by the banks in this environment.

Banks don't create wealth, they just siphon it off the true producers (agriculture and manufacturers), much as they have been doing since the early 80's when the interest rates started dropping relentlessly. This is the spiral of death, and the mechanism by which depression is the end result of deflation. The wiping out of the productive sector has been going on for all this time, it is just that now the characteristics are becoming just too obvious, much like the impoverishment of the american population during the same period. The banks (thus the government), want to preserve the preeminence of the financial sector at all costs, hence everyone else will be wiped out. Depression follows deflation, and that is what we have ahead very likely.

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Re: 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.

mred's picture
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Re: Deflation still winning the day

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.

 

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Bubble III (tm) for You and Me

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 (tm) has sagely advised since time immemorial ...

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

Cool PIMP MAH HOUSE, BEN BABY! Cool

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Re: Deflation still winning the day

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!

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Re: Deflation still winning the day

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. 

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Re: Bubble III (tm) for You and Me

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."

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Re: Deflation still winning the day

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).

 

 

 

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Re: Deflation still winning the day

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.  

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Re: Deflation still winning the day

 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

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Re: Deflation still winning the day

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

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Re: Deflation still winning the day

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.

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Re: Ka-Poom theory

[quote]

I read Mish's insights but also a variey of others.  Have a look around iTulip and Ka-Poom Theory regarding inflation/deflation debate.

No Deflation, Disinflation then lots of Inflation.  This one goes back to 2006 but, there are quite a number of threads on how it won't be a return to the Great depression (straight up deflation).

http://www.itulip.com/forums/showthread....

[/quote] 

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 

 

 

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Re: Deflation still winning the day

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.

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Re: Deflation still winning the day
[quote=mred]

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.

[/quote]

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.

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Re: Deflation still winning the day

"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

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Re: Deflation still winning the day

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...

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Re: Deflation still winning the day

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

 

 

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Re: Deflation still winning the day

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. 

 

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Re: Deflation still winning the day

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.

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Re: Deflation still winning the day

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?

 

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Re: Deflation still winning the day

The truck maker Scania in sweden had a decline of q 3 from 2007 40000 sold to q 3 2008 115 sold.

This is a decline of 99,7%. No wonder the car industry needs to layoff people.

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Re: Deflation still winning the day
[quote=steff66]

The truck maker Scania in sweden had a decline of q 3 from 2007 40000 sold to q 3 2008 115 sold.

This is a decline of 99,7%. No wonder the car industry needs to layoff people.

[/quote]
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Re: Deflation still winning the day

Deflation is the surest way in the short run to manage the inflation expectation as a result of Feds recent actions to explode its balance sheet.  It is part of attempting to keep status quo in the short run.

There is one more bubble that is clearly evident after the housing and credit bubble as a result of the 20th century oil and its related monetary explosion.  That bubble is the population itself.  Since the entire thesis as a result of Peak Oil is population has exceeded the planet's carrying capacity and is ripe for a correction.

The most favourable outcome for the human race over the long run is

1. Short run - purposeful demand destruction underway in response to peak oil as the ruling global super class try to manage the descend for a soft landing by deliberately deflate the economy at a controlled rate faster than oil depletion while managing damaging deflation expectation carefully through confidence measures such as bailouts and Central Banks' balance sheet tweaks.

2. Medium run - Controlled descend fails and super class concludes the population bubble need to be deflated in an orderly fashion as well.  The global unemployed as a result of step 1 are recruited into military to either expand Iraq War or start another regional war in name of security.  Inflation will result since wars are by definition inflationary, this will either solve the crisis or not but will polarize the remaining civilizations on earth.  eg China may stand with the developing world that are being decimated.

3. Long run - Regional inflational war does not solve the population problem and instead triggers global thermal nuclear war.  Large population centers such as those in China are nuked.  The great population bubble bursts and corrects to a small level and everybody who survive the holocaust lives happily ever after since they can now enjoy the fruits of labor of all the dead people for centuries to come.

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Re: Deflation still winning the day

T:

The smartest man I know opened my eyes to population. It is ALL about population. He suggested I watch Dr. Albert Bartlett (sp?) and I also googled immigration by numbers +video.

I hope we come up with some better alternatives to our dependency on oil and we live sustainably or I can see you scenarios or something different but equally as awful panning out. 

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Re: Deflation still winning the day

Question: Folks, am I missing something here?

SPV's I thought were primarily off balance sheet financing, that although maybe used for legitimate use, were at least for Enron used to hide billions of dollars in debt.

So the "Fed" is using SPV's to guarantee 90% of the $600,000,000,000.00 of money market loans, I thought to get confidence back in the money market. Now they are pushing the start date back.

Chris wrote, and I quote, "Either the Fed is running out of maneuvering room on its balance sheet (which is a VERY big story if true), or they are displaying a clear bias for institutions and against individual people (the more likely explanation)."

My questions are:

 

  1. Aren't SPV's/Derivatives that got us into this mess?
  2. Isn't it weird/ironic and possibly insane that they are using them to protect money markets?
If yes and yes then I think Chris is right, on or off balance sheet I think this IS THE storey.
 
Thanks in advance.... 

 

 

 

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Re: Deflation still winning the day

US May Lose Its 'AAA' Rating

US May Lose Its 'AAA' Rating
CNBC.com | 10 Nov 2008 | 07:49 AM ET

The United States may be on course to lose its 'AAA' rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.

"The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system" and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

"In the United States there is already a funding crisis, and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off," Hennecke told CNBC.

In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.

As for a stimulus package, there is not much of an industry left to stimulate back into life, Hennecke said.

CNBC.com

http://www.dailypaul.com/node/72768
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Re: Deflation still winning the day
[quote=T]

Deflation is the surest way in the short run to manage the inflation expectation as a result of Feds recent actions to explode its balance sheet.  It is part of attempting to keep status quo in the short run.

There is one more bubble that is clearly evident after the housing and credit bubble as a result of the 20th century oil and its related monetary explosion.  That bubble is the population itself.  Since the entire thesis as a result of Peak Oil is population has exceeded the planet's carrying capacity and is ripe for a correction.

The most favourable outcome for the human race over the long run is

1. Short run - purposeful demand destruction underway in response to peak oil as the ruling global super class try to manage the descend for a soft landing by deliberately deflate the economy at a controlled rate faster than oil depletion while managing damaging deflation expectation carefully through confidence measures such as bailouts and Central Banks' balance sheet tweaks.

2. Medium run - Controlled descend fails and super class concludes the population bubble need to be deflated in an orderly fashion as well.  The global unemployed as a result of step 1 are recruited into military to either expand Iraq War or start another regional war in name of security.  Inflation will result since wars are by definition inflationary, this will either solve the crisis or not but will polarize the remaining civilizations on earth.  eg China may stand with the developing world that are being decimated.

3. Long run - Regional inflational war does not solve the population problem and instead triggers global thermal nuclear war.  Large population centers such as those in China are nuked.  The great population bubble bursts and corrects to a small level and everybody who survive the holocaust lives happily ever after since they can now enjoy the fruits of labor of all the dead people for centuries to come.

[/quote]

While I am not one to underestimate the amount of control the ruling elite possesses, I think you are overestimating it here.  There are just too many variables at play here for the ruling elite to orchestrate like a finely tuned symphony.

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Re: Deflation still winning the day

GregRoberts:

SUPER Post and I'd reccomend to all watching that video http://www.cnbc.com/id/27641538

that GregRoberts posted!

I loved the stupidity of the news reporter and the econimist (raise taxes, and the US can just print money so the S&P guy should be called off.)

I think when this happens we can kiss deflation goodbye and say hello to hyper inflation until the redemoninate the dollar. 

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gregroberts
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Re: Deflation still winning the day

Another article predicting inflation in the future...

http://www.24hgold.com/news-gold-silver-USTBond-Obelisk--Printing-Press.aspx?langue=en&articleid=341302_Jim_Willie_CB

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numen
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Re: Deflation still winning the day

[quote]3. Long run - Regional inflational war does not solve the population problem and instead triggers global thermal nuclear war.  Large population centers such as those in China are nuked.  The great population bubble bursts and corrects to a small level and everybody who survive the holocaust lives happily ever after since they can now enjoy the fruits of labor of all the dead people for centuries to come.[/quote]

 

If the preservation of capital goods is a goal of this form of, um, "demand destruction", then presumably famine and pestilence would serve the purpose better than war...

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Davos
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Re: Deflation still winning the day

GregRoberts:

 

Another super link. Thank you. I read, I think on Mish's site or on Casey Researches site that once the bond markets start closing with more sales than buyers - watch out. I have yet to find the chart where it shows this but I caught the expert being interviewed by the 2 cheerleaders that he (the expert) said it already was doing or had done that (closed with more to sell than those to buy.) 

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