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Don't Be Fooled: Inflation Has The Upper Hand

Wednesday, December 8, 2010, 5:23 PM

Here at Martenson Central, we are endlessly keeping a close eye out for the emergence of deflation, defined here as the purchasing power of the dollar going up. 

Technically, inflation and deflation are terms that indicate a particular combination of money surplus or deficit (respectively), demand for money (of which velocity is but one measure), and demand for various goods and services (which themselves may be in abundance or short supply).

The reason that the inflation vs. deflation debate has been so noisy, yet simultaneously so murky, is that all of these intersecting variables impact the final equation.  It is like the difference between trying to balance a single broomstick on your outstretched hand vs. trying to balance a broomstick with three well-greased hinges at points along its length.  The former is tricky enough to balance; the latter would be impossible for nearly everyone.

Some try to reduce the inflation/deflation debate to a single broomstick (“…all we need to do is look at declining credit and see that we are in deflation!”), but in my opinion, that is far too simplistic a view.  We still need to consider base money creation, velocity, and the relative level of faith in current and future monetary policy among the majority of market participants.

Because we cannot really know all the variables and how they are feeding back and forth between each other, we must simply look at the final impact to gauge where we are.  Fortunately, we can do this with relative ease. 

Again, what we care about at the end of the day is whether our future money will buy more, or whether it will buy less -- and, naturally, whether we will even have any coming our way. 

The argument for deflation says that because of declining credit, people will hold onto whatever money they have for dear life, unsure if more money will be forthcoming.  In this case, the velocity of money will slow and collapse.

The argument for inflation includes the idea that existing debts are a form of money and that the world’s central banks are busy printing up more than enough new money to swamp both the commodities markets and people’s preferences to hold something that can be created without any effort or cost.

Many in both the inflationist and deflationist camps say that prices are not worth analyzing because they are the result of, not the cause of, either "-flation."  But it would be a mistake to ignore prices simply because they represent the passenger, not the driver, in the story.  Knowing where the passenger is going can give you a pretty good indication of where the driver is headed, and therefore it’s important to keep a close eye on prices when assessing inflation/deflation.

Prices

On the plus side for inflation are commodity prices, which are again nearing their all-time peak and which have been compounding at an average annual rate of slightly more than 10% over the past decade.

 

But they seem to be at a critical juncture on this longer term timeline.  Either they will break out from here, or they will be rejected, creating a massive double top not unlike the one seen in the stock market in 2000 and 2007.

Still, commodities could fall back a long way before they would violate the trend line in place since early 2002, when prices began the ascent that would see them finally break out of a long-standing range.

In my book, ten years is a respectable amount of time to assess commodity prices.  Beware those who cherry-pick the 2008 topping event as their reference point, as they are missing the larger story of the trend line that I have drawn in blue above.

But commodities are just a small component of the overall price landscape.  If one trusts the CPI statistic -- and I really have my doubts about its construction and methodologies (that’s putting it mildly) -- then it would seem that prices are actually quite tame and that disinflation (in which inflation is declining slightly month-by-month but still rising overall) is the greater concern, as the Fed has claimed.

But even here, when viewed on a longer time frame, I really do not see anything to suggest that we are facing a dire catastrophe of price collapse:

 

What I see in the above chart is that prices first climbed at one rate between 2001 and 2004 (first red line segment on the left), then climbed at a faster rate until a blowoff in 2008, have since recovered, and are climbing again quite handily. 

For the record, I happen to think that the CPI systematically undercounts inflation due to underweighting certain components (especially medical care) and completely avoiding the impact of taxes on spending and costs.  Given this, the fact that the CPI is higher this year than last year, we have to score another one for inflation. 

But it’s almost certain that inflation is higher than stated by the CPI, so we might want to rate that one just a little bit more strongly than a literal interpretation of the CPI might suggest.

On the subject of house prices, the situation strongly favors deflation.  And given the importance of housing to the health of bank balance sheets and consumer wealth effects, this is certainly one of the demons that the federal government and Federal Reserve are fighting tooth and nail:

 

While house prices are above where they were a year ago, the bounce has been anemic at best and has recently turned down again.  This is a very poor sign.  Score one for deflation.

Stocks are now at two-year highs, bonds are up quite strongly over the past several years, and oil is at a two-year high.  All of these weigh towards inflation being the dominant theme of the day.

With regard to prices alone favoring inflation, we find that commodities, stocks, bonds, medical costs, college tuition, and the CPI itself are all up over the past year, and in the case of everything but stocks, the past decade.

Conclusion

The point of this approach is to keep prices firmly in view when thinking about inflation and deflation.  While the theories about the role of money and credit as the drivers of the ‘-flations’ are very important to understand, what we really care about at the end of the day is the final impact on our purchasing power.  By nearly every measure, except in limited cases sprinkled throughout (with housing being the most visible and important), we find that prices have been rising smartly.  Or we could say that the dollar and other fiat currencies have been sinking, which is a more accurate way to think about the dynamic. 

This should not surprise anybody, as it is the obvious result of massive printing efforts undertaken by nearly every OECD central bank in response to the prior crisis caused by too-cheap money.  Nor should it confuse students of our economic system, who know that continuous increases in asset prices and real things are essential to the very functioning of the entire system.  Growth is a requirement of our monetary system and, by extension, our economic system.  With growth, everything is fine and the status quo can be preserved.  So naturally there is strong support for all manners of growth within and across our political and financial institutions.  Without growth, the system misfires and threatens to collapse.

Those who read history also know that inflation is by far the more common outcome of a situation in which there is entirely too much sovereign debt that cannot be repaid by ordinary means.  All one needs is to take a quick glance at the balance sheets and off-balance-sheet obligations of practically every developed country to realize that collective insolvency is the correct term to apply. 

So at this point in the story, we see that prices have been rising, our fiscal and monetary authorities are trying quite hard to foster even more rapid price escalations, and they are doing so because the system demands it of them.

Right now, based on prices, we have to score inflation as the winner, although we’ll be the first to change our tune should the data change

Part II of this report covers the rest of the story by going into money and credit (the true drivers of the ‘-flations’) more deeply, as well as other economic data important to helping us figure out where we are in this story, how much time might remain before another “adjustment” arrives, and what we might do about protecting our wealth and opportunities. Click here to access Part II (free executive summary; paid enrollment required to access).

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42 Comments

dryam2000's picture
dryam2000
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Re: Don't Be Fooled: Inflation Has The Upper Hand

At the very time I'm reading this I'm watching Fox Business & Bart Chilton, head of the CFTC, is on talking about them wanting to place limits on how much people can invest in commodities.  He says there's way too much speculation going on with all of the big run-ups of the various commodity groups, and the American people are paying the price in the way of higher prices.

What a crock!  The free market is completely dead. 

JAG's picture
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Re: Don't Be Fooled: Inflation Has The Upper Hand

Its funny Dr. M....when I look at the markets I see signs of inflation, but when I look at my local economy I see signs of deflation, (literally, I counted 4 people holding signs advertising sales at local businesses along the road home tonight). Nobody I know has any money, it's going to be a bleak Christmas by material standards this year (which is probably a good thing for all involved).

I can only conclude that there are two spheres in our society, each with their own money supply. One of these spheres is inflating, and the other is deflating. Which of these spheres will pop when the two meet? Maybe both.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

My sincere apologies....I don't know what happened.

TechGuy's picture
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Re: Don't Be Fooled: Inflation Has The Upper Hand

Keep in Mind that China is due for a major correction. It now has very high inflation causing China to implement price controls. Germany is p*ssed on all the EU bailouts and may remove its self from the Euro. Without Germany, the Euro would collapse in short order.

That said, It might cause some really strange price swings in the US. If either or both China and Europe collapse the dollar will strengthen. However, if Factories in Europe and China shutdown (Credit, Riots, etc) the US "Just-in-time-economy-dependant-on-foriegn-imports" has a problem.

In my opinion, Both China and Europe have a 50-50 chance each, of a collapsing in 2011. A collapse in Europe or Asia will likely be the catalyst for a third World War, as it will trigger the rise of fascism and totalitarianism again, much like happened during the last great depression of the 1930's, when Japan and half of Europe turned to militant Fascism. I don't think WW3 will happen immediately after the collapse of Asia or Europe, but many years after. It takes time for dictators to rise to power and consolidate it. When you see the rise of miltant or politicians speaking about strong nationalism and blaming outsiders for problems you can pretty much guarantee WW3 will happen.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

dryam2000 wrote:

At the very time I'm reading this I'm watching Fox Business & Bart Chilton, head of the CFTC, is on talking about them wanting to place limits on how much people can invest in commodities.  He says there's way too much speculation going on with all of the big run-ups of the various commodity groups, and the American people are paying the price in the way of higher prices.

What a crock!  The free market is completely dead. 

Wonder if they will get around to limiting how much JP Morgan can short silver ?

Farmer Brown's picture
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Re: Don't Be Fooled: Inflation Has The Upper Hand

Commodity prices may be high, but producers are not going to be able to pass these cost increases onto the struggling, unemployed, credit-scarred consumer for long, if at all.  Just because commodity prices are up does not mean end-consumer prices are up.  They may be, but it does not have to be a 1:1 correlation.  The middle man may have to eat part of the price increase because the consumer is tapped out. 

I do not see it as very likely that commodity prices can continue to push higher becasue the end consumer will not be there to absorb the cost.  Without there being an increase in wages or in employment, both of which seem laughably/sadly distant and improbable, commodity prices cannot stay up. 

Commodity prices are up because of Fed money printing, I'll agree to that.  Chinese dollars don't have to buy US Treasuries because Count Ben-the-Bernanke R. Feiter is doing all the buying necessary, so those dollars have to go somewhere, and apparently it is commodities.  However, that's a speculation-driven increase, not a demand driven increase, and just like the speculation-driven housing bubble, looks set to snap, crackle, and pop.  Cry

snap, crackle, pop!

cmartenson's picture
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Re: Don't Be Fooled: Inflation Has The Upper Hand

No ability to pass along prices to consumers?

I think I read different news sources than you, FB.  Remember the McDonald's price hikes last month?  Clothing on the basis of cotton price hikes? I recall those, too.

If you google these terms, "price hikes rises," and constrain your search to just the past month, you will get 1,350,000 results.  The UK is facing all manner of price hikes, from knitwear to electricity to diesel, people all over the globe are having enormous difficulty paying for food, tuition is up another 5% in the US this year, and health care is up close to 10%

China is facing enormous inflationary pressures that may cause it to hike rates again soon.

I daresay that, from my point of view, there are ample signs of prices being merrily passed along to people...I think the idea that "producers can't because people can't afford it" is an interesting theory, but one that I think really deserves to be substantiated by some facts.

Here's a conundrum for you to solve:  If producers are facing higher input costs but cannot pass them along to consumers, then how is it that corporate profits are doing so well?  

At any rate, I see ample evidence of higher prices in the news I read.   Maybe not for certain segments of the population here and there, but certainly for the bulk of the world this seems to be true.  How could it be otherwise with food and fuel up so much over the past year?  

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Re: Don't Be Fooled: Inflation Has The Upper Hand

JAG wrote:

Its funny Dr. M....when I look at the markets I see signs of inflation, but when I look at my local economy I see signs of deflation, (literally, I counted 4 people holding signs advertising sales at local businesses along the road home tonight). Nobody I know has any money, it's going to be a bleak Christmas by material standards this year (which is probably a good thing for all involved).

I can only conclude that there are two spheres in our society, each with their own money supply. One of these spheres is inflating, and the other is deflating. Which of these spheres will pop when the two meet? Maybe both.

I wonder why this was flagged. Not that I agree with the comment but it is just expressing a difference of opinion. So why would someone flag it?

Just wondering.

Ken

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Re: Don't Be Fooled: Inflation Has The Upper Hand

cmartenson wrote:

No ability to pass along prices to consumers?

I think I read different news sources than you FB.  Remember the McDonald's price hikes last month?  Clothing on the basis of cotton price hikes? I recall those too.

If you google these terms, "price hikes rises" and constrain your search to just the past month you will get 1,350,000 results.  The UK is facing all manner of price hikes from knitwear to electricity to diesel, people all over the globe are having enormous difficulty paying for food, tuition is up another 5% in the US this year, and health care is up close to 10%

China is facing enormous inflationary pressures that may cause it to hike rates again soon.

I daresay that from my point of view there are ample signs of prices being merrily passed along to people...I think the idea that "producers can't" because people can't afford it is an interesting theory, but one that I think  really deserves to be substantiated by some facts.

Here's a conundrum for you to solve; if producers are facing higher input costs but cannot pass them along to consumers, then how is it that corporate profits are doing so well?  

At any rate, I see ample evidence of higher prices in the news I read.   Maybe not for certain segments of the population here and there but certainly for the bulk of the world this seems to be true.  How could it be otherwise with food and fuel up so much over the past year?  

What I said was that while price increases may be passed on to consumers, it may not necessarilly be a 1:1 correlation. 

The broader point is that, if we agree that wages and employment are down, the economy is debt-saturated and burdened, and peak energy is here, just how are these commodity price increases supposed to be sustainable?

By the way, if you google "price cuts", and constrain yourself to the last month, there are 124 million results.  That's 92:1 vs "price hikes". 

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Farmer Brown wrote:

Commodity prices may be high, but producers are not going to be able to pass these cost increases onto the struggling, unemployed, credit-scarred consumer for long, if at all.  Just because commodity prices are up does not mean end-consumer prices are up.  They may be, but it does not have to be a 1:1 correlation.  The middle man may have to eat part of the price increase because the consumer is tapped out. 

What companies are also doing is shrinking the size of products, while keeping prices flat. That's a stealth price increase. How does or would the CPI measure that?

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Re: Don't Be Fooled: Inflation Has The Upper Hand

If demand remains static while production decreases (even slightly) and prices will increase. Also, factor in the rise in the price of oil as it affects everything else.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

JAG wrote:

Its funny Dr. M....when I look at the markets I see signs of inflation, but when I look at my local economy I see signs of deflation, (literally, I counted 4 people holding signs advertising sales at local businesses along the road home tonight). Nobody I know has any money, it's going to be a bleak Christmas by material standards this year (which is probably a good thing for all involved).

I can only conclude that there are two spheres in our society, each with their own money supply. One of these spheres is inflating, and the other is deflating. Which of these spheres will pop when the two meet? Maybe both.

Along the same lines, my commute to work runs along 2 major highways, 2 different areas of the state and 2 different segments of the economy. 1 highway is based on the FIRE economy. The other highway runs through one time industrial towns, now former shells of themselves with retail strip malls and not much economic activity. The FIRE highway, is loaded with vehicles and traffic jams every morning. The former industrial highway is traffic free. It's almost the inflation vs. deflation highway comparison.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Stagflation in the 80's proved that inflation and recession are not mutually exclusive.  Today, in our global economy, World commodity prices are rising even while the the average American's purchasing power is weak.  You can have both.  A weak world reserve currency, an emerging East flush with cash and uber-rich investors are driving costs higher.  Nacci.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

I would like to float this as an explanation of why we are confused about the inflation/deflation issue.

Both are occurring.

From watching the <a href="http://rt.com/programs/keiser-report/" target="blank"> Keiser report on Russia Today</a> I gather that the FED is issuing script to the Banksters in order to inflate the economy.

This money is being used to buy commodities. It is not getting into the street.

This raises the price of commodities.

The working classes see none of this cash, so they do not experience wage increases but they do enjoy rising costs of real commodities, like food.

So the economists and bankers see lots of money and rising commodity prices (inflation), but the proletariat see decreasing wages and increasing costs (stagflation).

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Re: Don't Be Fooled: Inflation Has The Upper Hand

I really think looking at commodity price increases over the last 10 years is a flawed approach. We would really have to go back decades to see the activity of prices outside of a massive credit bubble. During this bubble, the prices of stocks, bonds and commodities were massively overvalued through leveraged consumer demand and investor speculation. Now, we have reached a critical turning point marked by debt saturation. This is why past trends in prices fail to tell a reliable story for the future.

The recent commodity price increases due to "hot money" speculation may be passed on to consumers to some extent, but that is exactly why inflation is likely burn itself out. There is very little real or artificial wealth left for the average person to maintain current levels of demand for these commodities at current prices, let alone at even higher prices. CHS also does a great job of explaining cost increases in education and healthcare are due to "Boumel's disease", which deals with slower rates of productivity rather than underlying inflationary pressures (besides higher demand due to consumer credit inflation, which has obviously reversed). There is no doubt that demographic, structural, energy and sovereign debt issues will eventually coalesce to create a currency crisis, but right now most of the reliable indicators point in the opposite direction. 

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Re: Don't Be Fooled: Inflation Has The Upper Hand

I think Farmer Brown is on the right track - there is a limit to what tapped out consumers will pay for essentials. Right now a lot of discretionary expenditures are contracting. People are prioritising but they have not given up hope that the GFC is over. We are coming to the end of a period of reflation (since March 09) which has seen equities and commodities rise persistently. However, the Dow only rose against Gold until late August last year. Gold is not money but it is a store of value. Historically, it has tended to go up and down with equities. From the 30s to early 70s it was fixed in price against the dollar. When Nixon reneged on the Bretton Woods deal in 1971 there was a rapid period of catchup to account for the inflation that had taken place since the 30s. It overshot and then pulled back and remained in a restricted band for 20 years. If, as I expect, equities form a top soon, I would also expect gold to move downwards with equities as we start deflating again. Dollar production is not really rising. The number of greenbacks in circulation is somewhere around 870 billion. They will become more valuable as the deflation progresses. The production of credit was rising continuously since the formation of the Federal Reserve in 1913 but turned over only very recently. The Fed would have to increase QE 10 fold to have any chance of stopping deflation but the unintended consequences of such an attempted manipulation would probably be worse than the deflation they want to stop.

The Fed and politicians of all stripes have been remarkably successful so far in demonising deflation. Most people should be happy to see prices dropping but, of course, most are still in thrall to the price of their home. Many will lose their homes because their payments account for too great a part of their income. In a deflation the burden becomes greater and greater. The process is happening faster in the US because the mortgages in most states are non recourse so defaults are happening faster. At the other end of the deal, in the bank's balance sheets, things are even worse but not yet apparent because the banks have been allowed to sidestep accounting rules so nothing is being marked down as it should be with honest accounting. They are surviving on great lashings of hope and flim-flam.

Deflation will not happen evenly (US real estate has obviously dropped more relentlessly than anything else) but over time I would expect the relativities to adjust so that food becomes a larger part of the spend than housing. 100 years ago food accounted for three quarters of spending and housing took up most of the other quarter. That ratio has been reversed but I would expect things to move more in the farmers favour. I hope so for everyone's sake.

I find it hard to understand how anyone can seriously believe that because, for example, a 2 bedroom unit in a Brisbane suburb was bought for A$90k in 2001 and that it is today valued at $300k+ that that unit has more than 3 times the utility as it had 9 years ago. The figures merely represent massive inflation which is set to reverse. The boosters love to tell us that Australia is 200,000 dwellings short but I see no evidence that we have 400,000 homeless people. In fact I see empty houses everywhere, as well as empty shops, offices and industrial buildings. I would not pay too much attention to earnings - they rarely tell you anything about the future.

Deflation is ultimately a force to the benefit of most people. It is entrenched special interests to whom it represents a potent and destructive threat - that is the major financial corporations and governments.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

http://www.dailyfinance.com/story/company-news/dollar-stores-walmart-cus...

Dollar Stores Are Taking Walmart's Lunch Money

12/04/10

Thrifty shoppers looking for low prices on basics are frequently passing up the big boxes of Walmart (WMT) for the tighter aisles of their local dollar stores.

Chains such as Dollar Tree (DLTR), Family Dollar Stores (FDO) and Dollar General (DG) are hitting the world's largest retailer where it hurts -- in the food and pharmacy aisles. The rock-bottom discounters are revamping their stores and replacing no-name products with nationally known brands, luring in both the low-income shoppers who have been Walmart's core customers and higher-income households getting thriftier in hard times.

"Dollar stores for the past two years have put more money behind how they present consumables and fresh food to their customer base," said Brian Sozzi, retail analyst at Wall Street Strategies. "It's in dollar stores' best interest to offer an increased amount of food, in the hopes of getting a greater share of wallet." Their selections are still limited and not comparable to what a Walmart offers, but the addition of national brands helps, he noted.

As cash-strapped consumers have moved to cut their spending, they've found the dollar stores quite willing to accommodate them. As Walmart pulled back last year on the number of low-price, low-margin items it was stocking to improve stores' sales numbers and boost profits, dollar stores stepped in to fill the void -- and Walmart's sales suffered.

Gaining Ground With Higher-Income Shoppers

"Dollar General is not the place it was two years ago," CEO Rick Dreiling told analysts earlier this year. During 2010, it has added national brands including L'Oreal cosmetics and Heinz foods, part of an overhaul of the company that followed its public offering in November 2009. Older stores are being revamped and new ones have opened at a fast clip.

And as the overhaul continues, it's becoming easier to attract national brands and shoppers.The company's fastest growing customer segment comes from households making more than $70,000 a year, Dreiling told the analysts.

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Biflation

Costs are increasing. It doesn't matter whether it's due to speculation or global demand by a aspirational workers in Brazil and China (now making $1 an hour where before they were making $0.50 per hour) or what-not. Costs are increasing.

Here in America, those businesses that can pass along the costs (health insurance) will do so. Those that can't will either get squeezed on their margins or find ways to pass the costs along or find cheaper sources (China, Mexico).

For example, restaurants can offer smaller portions or more-fries-less-steak. Everyone knows Dreyer's (Edy's out on the East Coast, same company) ice cream no longer comes in half-gallon containers. Or other goods: fewer ounces, same box size. Instead of a steel widget in a washing machine, they can use one made of solid nylon.

At the same time, wages are stagnating or going down in America even as they are going up in the rest of the world. There are fewer jobs available here, so more people are underemployed or just plain unemployed. People are much more careful in how they spend these days.

We are in the days of biflation.

Poet

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Re: Don't Be Fooled: Inflation Has The Upper Hand

In Australia we are seeing deflation and inflation.

Retailers here are crying because prices are headed south just to try and make sales. On the other hand utility prices here have skyrocketed and people are squeeling all the time about their powerbill price rises. However, the utility prices have not pushed out into the retail maket simply because no-ones spending here. Debt is being written down when possible as the government here has been telling people for a while that interest rates cannot remain low for-ever.

If your in mining here your doing ok. Banking for now is doing ok although tell-tale signs of a squeeze in that sector are starting to show - the release of information that two major banks here borrowed for the FED hasn't done anything for people's confidence as well as lots of rumors floating around about the recent NAB banks mass failures bring down ATMs' and banking facilities - some are even going so far as to say the bank itself has funding issues.

What's hidden in large measure is the loss of people's additional overtime. People might have kept their jobs (sadly, I am not one of them) but they have had their take home pay cut by loss of over time. Australian's work some of the most unpaid overtime in the world now - people are doing everything possible just to hold their jobs. As China slows, so does Australia.

Not knowing a lot about economics - how is it that all the debt that was bailed out will be paided back when rates rise and people have less disposible income from which to pay it back? If they go to the wall isn't that deflationary in the long run?

I mean those assets get revalued and bought up by someone with money at a cheaper cost than buying from new - which in turn drives down the prices because others offering the same goods must lower their price to compete in real terms? Isn't this a deflationary knock-on effect (don't know the term for it)????  I'm at a loss to understand inflation winning here so excuse my naive economicla understanding - I guess I just look at things at the street level. I don't see the velocity of money increasing as people continue to pay down debt fearing pending rate rises.

Explanations as to how inflation ultimatley has the upper hand greatly welcomed :-)

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Re: Don't Be Fooled: Inflation Has The Upper Hand

http://www.moneynews.com/Economy/UN-Warns-Surging-Food/2010/11/17/id/377276

UN Warns of Surging Food Prices,  'Harder Times Ahead'

Wednesday, 17 Nov, 2010

World food imports will exceed $1 trillion this year, close to the record reached in the food-crisis year of 2008, on surging commodity prices, the United Nations’ Food and Agricultural Organization said.

The global cost of importing foodstuffs will jump 15 percent to $1.026 trillion in 2010, from $893 billion last year and compared with $1.031 trillion in 2008, the Rome-based FAO said in a report today. The world faces “harder times ahead” unless production of major food crops rises next year, it said.

Rising global demand for non-staple foodstuffs including dairy and meat is inflating the international food bill, according to the report. The “sharp” rise in grain, sugar and oilseed prices in recent months is a cause of concern for prices next year, the agency said.

“It is unlikely that the effects of higher prices will be contained in their respective sectors, as many of these commodities constitute major feedstock ingredients for the livestock or biofuels sector,” the FAO said. “With price increases largely reflecting scarcity in export supply, global competition for securing foodstuffs is set to intensify.’”

Food prices rose to a record in June 2008, prompting deadly riots in countries from Haiti to Egypt, before falling in the second half of that year. The FAO’s world food price index in October climbed to the highest level since July 2008.

'Harder Times'

The world should “prepare for harder times ahead unless production of major food crops increases significantly in 2011,” the FAO said in a statement. “For major cereals, production must expand substantially to meet utilization and to reconstitute world reserves.”

The outlook for the global food-import bill this year was raised from $921 billion in June.

World cereal production is forecast to decline 2.1 percent to 2.22 billion metric tons in the 2010-2011 season, a reversal of a June outlook for a 1.2 percent rise, the FAO said. The decline is mainly due to a smaller crop in the former Soviet Union and “disappointing” yields in the European Union, the U.S. and Canada, it said.

Global grain stocks are expected to slump 7.2 percent to 512.5 million tons at the end of the 2010-2011 season, instead of rise 0.9 percent as previously forecast.

Farmers are likely to respond to current grain prices by increasing planting, the UN agency said. Rising prices have also made commodities including soybeans, sugar and cotton more attractive to grow, which may limit the production response of some products to a level “insufficient to alleviate market tightness,” the FAO said.

Higher Prices

“Against this backdrop, consumers may have little choice but to pay higher prices for their food,” the FAO said. “International prices could rise even more if production next year does not increase significantly,” especially in corn, soybeans and wheat, it said.

World wheat production is forecast to slump 5.1 percent to 647.7 million tons in 2010-2011, the lowest level in three years, even as usage climbs 1.2 percent to a record 668 million tons, the FAO said. The harvest outlook was cut from 676.5 million tons in June.

“The bulk of this downward revision reflects a sharp fall in production in the Russian Federation and smaller-than- expected harvests in many other countries,” the FAO said.

The agency forecast stocks of wheat will slide 9.9 percent to 180.9 million tons at the end of this season.

Wheat Prospects

“Attention is now increasingly on production prospects for 2011,” the FAO said. With winter plantings in major producing countries of the former Soviet Union “lagging behind last year and unfavorable weather hampering early crop development in the U.S., prices are expected to remain high and volatile for the remainder of the season,” the FAO said.

Output of coarse grains, which includes corn and barley, is forecast to slide 2.1 percent to 1.102 billion tons from 1.125 billion tons in 2009-2010. Ending stocks are expected to plunge 12 percent to 198.4 million tons, the FAO said.

“Considering that prices of coarse grains at this time of the year, corresponding with the main harvest period in Northern Hemisphere, should normally be at their seasonal lows, there is a strong likelihood that prices may rise even further from these already high levels,” the FAO said.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

I have a feeling that things have just changed to where we are in for a bout of deflation now. The timing of this article might not be the best in determining what lies ahead.  I am shorting gold , oil, 30yr treasuries and japenese yen since 2 days ago. The technicals are showing higher volumes in these. Hence, I think the article should be titled "

Don't Be Fooled: Inflation Had The Upper Hand"

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Farmer Brown has hit the nail on the head: consumers do not buy commodities directly. The built in assumption of the analysis presented seems to be that commodity price increases translate directly to consumer goods price increases - this implicit assertion demands proof. Further, while joemanc's point about prices remaining flat while product size decreases is well taken, that is actually only happening in a tiny minority of cases - breakfast cereal springs to mind - as you can't 'shrink' most products. How do you shrink a suit? Or a water pump? Or an ink-jet printer? Or an iPad?

As far as whether those price hikes are being passed along to consumers, if you look at the NFIB's most recent version of their "Small Business Economic Trends" - located here: http://www.nfib.com/Portals/0/PDF/sbet/sbet201010.pdf - you find this:

"INFLATION
The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negative 11 percent, a three point decline. September is the 22nd consecutive month in which more owners reported cutting average selling prices that raising them. Plans to raise prices faded three points to a net seasonally adjusted seven percent of owners. On the cost side, four percent of owners cited inflation as their number one problem and only three percent cited the cost of labor, so neither labor costs or materials costs are pressuring owners to raise prices. With no pricing power and real sales volumes weak, profits are not able to recover."

Later in that same report, we find:

"Inflation? Not a threat. Far more owners have cut prices than raised them for 21 months in a row. Deflation? It certainly feels that way to a quarter of the owners reporting price declines for the goods and services they produce and sell..."

Are there some prices going up? Of course. But the issue is: on balance, are consumers facing higher or lower prices? This is a complex question, and goes to the heart of the basket-of-goods approach to measuring purchasing power changes. I would argue that even referencing CPI (i.e. asserting it under- or over-counts inflation) ties one to a basket-of-goods mentality, which can take one off into the weeds, and is therefore misleading.

An approach some suggest is to distinguish between needs and wants, since the bottom line could be said to be this: are the things we need going up or down in price? But even that quickly gets complicated. Energy in the form of heating oil for the winter is a need. Energy in the form of gasoline to run your jet ski is a want. Basic food staples are a need. T-Bone steaks twice a week are a want. Some textile products are a need, some are a want, etc. Further, needs and wants not only may be region specific, but also idiosyncratic.

In the end, at this point in time, I do not think it is possible to come to a conclusion about whether consumer prices as a whole are - on balance - currently in a regime of inflation or deflation. There are too many mixed signals coming from a very, very complex market situation - the appropriate thing to do in such a case is to accept the ambiguity.

The same can probably be said for the strictly monetary approaches, as credit destruction (aka money supply deflation) seems so far to be overwhelming the efforts of the powers-that-be to offset that via various approaches including monetization. Fed monetary policy and federal fiscal and social policy both so severely distort that aspect of the issue as to render it all but impervious to an analysis leading to actionable conclusions.

I've heard it said that the soundest metric for gauging emotional and psychological maturity is one's ability to tolerate uncertainty. Those of us who have difficulty with this (I include myself in this category) therefore seem to be faced with an opportunity for growth in this regard. ;-)

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Re: Don't Be Fooled: Inflation Has The Upper Hand

On "shrinkage" of products-

Products that cannot shrink in portion of size shrink in quality.  This has been going on for a while now, but those of us that repair their appliances and other household infrastructure have seen a rapid reduction in quality over the past few years.

A suit can be made with inferior/cheaper materials, can have the construction outsourced to a cheaper factory, etc. 

A water pump can be made with more plastic parts, parts made in China vs. US, thinner insulation on the windings, the list goes on.

Printers and iPods can be made with cheaper components, i.e. wider tolerances, that will not last as long or will have a higher percentage of failures.

These things are in fact happening, whether they are the result of inflation, corporate greed, or people's desire for low price over quality, I cannot say.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

All true statements, tictac1, but I don't think you grasped the argument to which I was replying, to wit: that stealth inflation is happening as, for example, cereal makers were shrinking the packages while maintaining the prices at the old levels. As this results in a higher cost per unit of cereal, this is arguably inflationary. Does this same thinking apply to suits and water pumps made from cheaper components? You'd have to document that those inferior products are being sold at the same price which would mean consumers are getting less for their money, although I'm not sure this would square with the notion of inflation, as we typically understand it. Because cereal is easily divisible - and water pumps are not.

That is, just because some products *can be* (and I agree in many cases, are) made with inferior/cheaper materials doesn't automatically equate to inflation, per se. Although if we consider the lifetime cost of buying water pumps and suits, perhaps it could be factored in, but I don't think it relates to the discussion here.

The other thing to remember here, and this goes to Dr C's original post, is that assuming production cost is the determining factor in price paid by consumer is fallacious, as Carl Menger, one of the fathers of Austrian economics,  demonstrated, and as Joseph Salerno of the Mises Institutes explains here:

http://mises.org/daily/4901

Relevant snippet:

"most people still take for granted the view that costs of production basically determine prices. Furthermore, they believe that if prices greatly exceed costs, it is the result of price gouging, monopoly, or some other nefarious scheme on the part of producers. But as Carl Menger, the founder of the Austrian School of economics, brilliantly explained nearly 140 years ago, past expenses incurred during the production of a good are completely irrelevant to the determination of the current price of a good. For Menger, the market price of a good is determined solely by the relative valuations of goods and money by the buyers and sellers of the good, in conjunction with the number of units of the good currently in existence. The records and memories of how much money was spent to enlist the labor and other resources needed to produce the good have absolutely no effect on how much money people are currently willing to exchange for a unit of the good."

This is not to say I think that increasing commodity prices will have no effect on costs of goods produced from those commodities - rather, it is to say that the relationship is a complex one, and depends on many factors (including whether the products created from commodities are needs or wants).

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Re: Don't Be Fooled: Inflation Has The Upper Hand

The market boomed and credit expanded until oil hit $150, and demand collapsed.  Now the market will cautiously advance and credit will slowly expand until oil hits $100 and then again demand will collapse.  Next the market will begin to comprehend the ceiling that oil production presents and there will be a flood of investment into companies focusing on renewable energy and other forms of efficiency. 

Oil is a permanant, downward sloping, resistance line for the entire economy.  The only thing that can point that resistance line upwards again is massively increased efficiency, or a new form of energy.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Derivitive contracts have a moneiness quality to their contract counterparties and have a "value" some 60 times greater than the world's yearly GDP. I prefer to define inflation or deflation as an increase or decrease in the supply of money and to define money as the sum total of cash and all the creatures created by credit (mortgages, derivitives...). Measuring inflation in terms of the price of a basket of goods is intuitive but misleading since money supply can decrease while goods in the measured basket can still become more expensive simply due to their production issues. Is that inflation or just scarcity? Now I think of hot money flows racing about the world and the shabby status of the US$ as world reserve currency and my head begins to hurt.

So I'm guessing we will have what appears to be inflation till there is a world shaking financial crash that puts an end to the game then there will be very little money left which is deflation in my book.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

This is an interesting thread.. obviously the CM community is not of one mind on the subject of inflation vs deflation.  I read Timeandtide state the Prechterite/Nicole Foss (Stoneleigh of TAE) deflationary thesis... and somebody else is shorting Gold.  I certainly appreciate the deflationary thesis... and we should by all means be in the throes of it now... but we are not.  We are not because Ben won't let it happen, and he has the power to stave it off with his printing press.  Deflation left unchecked at this point would destroy the system... our fiat monetary system, predicated on continuous growth, and our dependent banking system, would surely die if deflation started feeing on itself.  So Ben will choose probable death (even though he says he is 100% sure that he won't kill us with inflation) by inflation over sure death via deflation.   As I have stated in an earlier thread... I don't find the idea of getting a few thousand $$ more in our family paychecks next year, assuming the Bush tax cut extension and SS tax holiday "compromise" passes, particularly deflationary... and in the end it's Ben who is going to print the money to make up for that.   

Another point that I think some people miss is how the ever greater inequality of wealth distribution will drive future asset pricing... much more so than the state of the average consumer, which most of us have a more intuitive grasp of.  The average consumer's plight will have no correlation with Gold pricing in the dollar end game... the stock market's historical correlation to Gold will mean nothing once the wealthy start bailing on dollars (bonds).  Gold at current pricing represents a very small percentage of all investor class assets (I have heard 1% roughly)...  so think about that.  What if every wealthy person suddenly wanted 10% of their assets in Gold... and believe me.. that day will come.  The same will be true for other real assets, like oil, wheat, and corn.  There very well might be a shortage of paper money come the endgame... but all that digital money coming out of bonds (see Gonzalo Lira) will have to go someplace.      

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Another who thinks like I do;

http://viewfromthewilds.blogspot.com/2010/12/slippery-slope-to-hyperinfl...

"Has anyone hard of a central banker named Rudolf von Havenstein? He was the central banker who monetized Prussian Government Debt during Weimar Germany. Like Bernanke, he thought he could control the monetization of deficits. He thought he knew better, even though the weight of history was on the other side of the argument."

Any deflationist should first read Read Reinhart and Rogoff (I have it) and then re-evaluate their position based on historical precendent.

http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165

from an Amazon review of the book;

http://www.amazon.com/review/R2WFI96H4H0XGK/ref=cm_cr_pr_viewpnt#R2WFI96...

"Reinhart and Rogoff's book provides a quantitative history of financial crises derived from over 600 years and 66 nations. The basic message from all their data is that there are remarkable similarities in today's financial crises with experience from other countries and nations. The common theme is that excessive debt accumulation by government, banks, corporations, or consumers often brings great risk. It makes government look like it is providing greater growth than it is, inflates housing and stock prices beyond sustainable levels, and makes banks seem more stable and profitable than they really are. Large-scale debt buildups make an economy vulnerable to crises of confidence - especially when the debt is short-term and needs to be refinanced (the usual case).

Reinhart and Rogoff go on to conclude that most of these booms end badly. Outcomes include sovereign defaults (government fails to meet payments on its debt), banking crises (heavy investment losses, banking panics), exchange rate crises (Asia, Europe, Latin America in the 1990s), high inflation (a de facto default), and combinations of the preceding (1930s, today)."

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Re: Don't Be Fooled: Inflation Has The Upper Hand

I just want to thank Dr Martenson...yet another brilliant and insightful posting...and all those who participated  in this thread and added their own insight and personal evaluations. All of your thoughts, analysis, and opinions are very much appreciated.  And Poet, you are truly an artist in your writing. Considering my feelings and appreciation for Dr M's writing skills, I hope you realize the extent of that compliment. 

Saxplayer----  you are one in a million. I don't need Google anymore.  I just click on D/D comments or wednesday. Thank you so much. You really do have a handle on the entire "picture" and your articles sum it all up. Instantly. The only real fear is fear of the unknown. So to all of you who so generously and graciously share your gifts and wisdom, in order to prepare for an uncertain future, there are thousands of people around the globe who appreciate and value your knowledge and research.

I believe the "movement" is here, the world has had enough and is ready to face the truth and make a change....

Sincerest Congratulations, Dr Martenson, on your new, soon to be released book. Amazon.com..... pre-order....

You said you were going to "beat the drums" about the book.  I see NO drums on your homepage.  Would you consider beating a little bit louder?  SmileLike right at the top of the page where the other ads are?  I know how humble

you are, but ........ 

Many thanks to everyone here.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Jim H., thanks for posting the clear book review. As I read your comments almost daily, lately, I'm suprised that your post count is only 113. Thanks for your insite. Is there any data that shows that prior to a currency collapse that there is always/most often a yrmporary attempt at austerity  which is deflationary temporarily?

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Re: Don't Be Fooled: Inflation Has The Upper Hand

dbworld wrote:

Jim H., thanks for posting the clear book review. As I read your comments almost daily, lately, I'm suprised that your post count is only 113. 

I had the pleasure of meeting Jim H at last April's New Paltz lectures by Dr. Chris.  He's thoughtful and sharp and a good guy.  The reason his post count is (as yet) relatively low is that he only recently decided to let the tiger off the chain -- so to speak.  I've been happy to see him chiming in w/regularity these days.  Another excellent individual helping to make this the best online community devoted to the 3Es and What To Do About It.

Viva -- Sager

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Jim Hannah wrote:

Any deflationist should first read Read Reinhart and Rogoff (I have it) and then re-evaluate their position based on historical precendent.

http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165

LOL!

I have read (and listened to) this book a few times, and I would heartily say "any inflationist should first read and then re-evaluate their position based on historical precedent."  This is not an easy book to digest, and a thorough study of its content might change your mind on a hyperinflationary conclusion to the current state of affairs in the US.

John Mauldin had a series of excellent weekly newsletters covering various parts of this book, about 6-months-1 year ago. His website is currently being rebuilt, but when his archives come online again you might want to take a gander.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Hello Jag... you would have to be more specific about your position .. not sure how anyone would come away from Reinhart & Rogoff thinking that the value of their dollars would ultimately be protected and even enhanced through deflation.  Sure, there can be deflationary events and times during a collapse... and maybe you don't have a period of inflation --> hyperinflation... but the haircut in the value of your currency is going to come in the end.  I don't have time to go digging through the book again (it is quite dense as you point out).  

Here is another review I found that tends to support my own conclusion from the material (emphasis mine)... I see the words debasement and inflationary... but not the "D" word, hmmmmmmm;

http://press.princeton.edu/titles/8973.html

"Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. This book proves that premise wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned.

Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.

An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps."

Don't get me wrong... I will not hold the inflation thesis as my religion... I could be wrong.  I would like to be wrong, because truth be told, I have 50% of my net worth in retirement savings vehicles through which I cannot get to PM's, and which I could only shift into PM's and miners by QUITTING an excellent job that I enjoy.  So I am hedged well for deflation, should it be the endgame   : ) 

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Re: Don't Be Fooled: Inflation Has The Upper Hand

I asked a friend of mine who I think is pretty bright and is in the "deflation" camp to provide feedback to me on Chris's Post on "inflation having the upper hand"....his comments and perspective were interesting and I post them here.  I hope Chris reads these posts and would respond.

Friends response: 

John, that’s big order for me via email but I will get you a few thoughts from my reading below.

First, do a search on the number of times that he writes below about the fundamental causes of price change, that being supply and demand, and you will uncover that he is only talking about money supply, and once he mentions supply and demand in the oil sector.  So he does not make his case based upon the price changes that are caused by a change in supply relative to demand and a change in demand relative to supply.

So let me start with aggregate demand versus aggregate supply for goods, services and assets.  The question to think about is what will drive an increase in demand for any good relative to existing supply.  That is what drives a change in price that is called inflation or deflation.  An example is that we will see 40 million new Americans that will demand healthcare once Obamacare starts in 2014.  So what will happen to healthcare prices?  To answer that, you need to take a look at how will the supply for healthcare emerge to meet the demand for an additional 40 million people instanteously.  Services are most difficult sector of the economy to build supply quickly and so it could take a few decades to bring on line the number of educated and skill healthcare workers to meet the new and immediate demand.

So what will be the drivers of an increase in demand of the various goods and services in our economy?  For some there will be supply shortages and for others there is excess supply today. In certain industries that are oligopolies and monopoplies, the supply side is generally controlled and so pricing can inflate (like healthcare).  But for many, the technology is driving up the supply at much faster pace (media, books, education and knowledge, financial services, etc).  So if technology effects drive greater productivity what is the basic direction of supply…it is will increase without any effort.  Labor is a good example in that if there was no change in demand for labor, the demographics of longer living and a need to work to live will drive up the supply available for work by about 2 billion people worldwide over the next 30 years due to the births in the system already.  So what will be the cost of labor due to this natural increase in supply.  What will be the price effects of supply created by technology.  It will grow at a greater pace than demand.  Ipods and itunes are deflating in price every 2 months and so this is doing record sales as an example.  Housing is over supplied and so prices will fall.  Commercial office space is not needed as more technology allows people to not have to have an office and malls don’t need to be built for goods that can be better managed via a centralized inventory with an online portal to buy and ship with UPS.

On the demand side, we have not saved enough and we bought forward by going into debt.  So slower growth will cause household to save more as the slower growth will slow the growth rate of the economy and the earnings growth of corporations (equities).  The debt loads are so high and coupled with falling home equity is making the wealth fall thereby forcing a higher need to save.  The data is in place to show more savings already and so when there is savings there is less demand for goods.

Money is the same.  The supply of money versus the demand for money drives its price.  Allow me to take a different angle on this then I normally have.  AS the price of money goes up, it becomes more valuable relative to the goods that can be bought for it.  And vice versus.  If you are shortly money and long debt, you are already in a negative potential price situation if your lender decides call in the debt.  AT this point your price goes up.  REMEMBER there is $8 trillion of M2 money and $53 trillion of debt.  So the economy needs to turn the supply of money over 7 times at a 100 percent profit margin to retire the debt.  Thus, until there is more currency in the system than debt, there is always the potential for a shortage of money to exist to cover existing obligations.  As the economy slows, the velocity slows as he describes below.  The key is what is the cause of a slowing economy.  Is it velocity or it is aggregate demand for goods and services?  The real economy also starts with supply and demand for goods and services and the demand for money is simply to transact at a certain point of demand for goods.  IF you desire to transact for goods down the road in retirement, then your demand for money today is just to ensure that he will get the required flow of money at the time needed for your future purchase.  Therefore, you are willing to place your money in an illiquid status if you have confidence that the money will be there at the point of your desire to purchase.  However, if the asset that you exchange your money for today is not stable, you may not want to part with it.  So another point on the debt side is that if you believe that you will get your currency back, then you will lend it out in the form of a certificate of deposit to a bank or credit union, a stock purchase, a bond purchase or whatever.  If you lose confidence that the borrower of your currency won’t pay, then you won’t lend.  The failure to lend, is what causes the liquidity to not flow to those who have obligations to meet (The $53 trillion in debts).  IF the debtors can’t roll the debt, the must sell.  IF they must sell and supply exceeds demand, prices fall.  If prices fall to much, then everyone starts to sell, and prices fall further.  A vicious reinforcing loop.  In the end, the debts that cannot be paid by the borrowers, won’t get paid.  IT is that simple.  When debts default, the credit is destroyed.  When credit is destroyed, supply of credit contracts.  AS supply contracts relative to demand, prices fall. Etc.

Right now, we are seeing a shrinking demand for credit by credit worthy borrowers and so there is more credit supply available for credit worthy borrowers than there is demand.  Thus, the prices of credit is falling for the best borrowers.  This is not true for the non-credit worthy borrowers.  They want credit but there is no supply at current prices.  Ireland, Portugal, Spain and Greece are in this situation.  So if you can’t borrow to meet your debts, you must sell something and there is no demand for goods,  Thus prices adjust.

So I think you get the point and so I will leave you with this very simple question,  For inflation (prices to increase) to happen, what will be the conditions of supply of goods and services in which demand will exceed supply?  What aggregate demand in our economy will be increasing beyond the supply that will cause prices to rise?  What amount of currency will be needed to make the need for cash to meet current debt obligations so unnecessary that prices for money will fall in relation to the goods that they can buy?

Deflation via the collapse of demand in the face of excess supply will drive prices down for a while.  Then at the bottom of the price declines we will see a complete purging of the excess supply in the marketplace.  Once the excess supply is gone, then we have the conditions for inflation (and increase in prices) if demand grows faster than new supply can be created.

I hope this gives some perspective.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

udman wrote:

...Thus, until there is more currency in the system than debt, there is always the potential for a shortage of money to exist to cover existing obligations. 

The day we have more money than debt, is the day when we have sound money...

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Re: Don't Be Fooled: Inflation Has The Upper Hand

"For inflation (prices to increase) to happen, what will be the conditions of supply of goods and services in which demand will exceed supply?"

Very, very simple.... Loss of confidence in the currency is the condition.  Your well thought out mathematical view will go out the window if a large enough swath of dollar holders decide that they would rather get of get rid of them (in favor of other currencies, or hard assets) because they are becoming increasingly sure that they will lose value in the future..  

Look at Adam's post regarding the run on dehydrated food... it is real.  There is a micro-example of this phenomenon for you.  Leading edge loss of confidence in the currency just drove this little niche market way out of it's usual supply:demand balance point.  You don't think loss of confidence is coming?  It is coming.  Chris and Adam posted this for a reason.        

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Re: Don't Be Fooled: Inflation Has The Upper Hand

We are experiencing both price inflation and price deflation at the same time... by design.  We are in the middle of the largest transfer of wealth this world has ever seen.  The "Powers that Be" are destroying our weath by destroying the monitary value of our homes and eliminating our jobs, while at the same time increasing the cost of food and energy.  It's been a slow process (since the Federal Reserve was created), but we are now heading into the last phase.  Much will happen in the next few years where we will literally be eating and burning our wealth into extreme poverty, and even death if we are not prepared.

Be prepared and have faith in God.

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Re: Don't Be Fooled: Inflation Has The Upper Hand

Jim Hannah wrote:

Very, very simple.... Loss of confidence in the currency is the condition.  Your well thought out mathematical view will go out the window if a large enough swath of dollar holders decide that they would rather get of get rid of them (in favor of other currencies, or hard assets) because they are becoming increasingly sure that they will lose value in the future..  

Look at Adam's post regarding the run on dehydrated food... it is real.  There is a micro-example of this phenomenon for you.  Leading edge loss of confidence in the currency just drove this little niche market way out of it's usual supply:demand balance point.  You don't think loss of confidence is coming?  It is coming.  Chris and Adam posted this for a reason.        

I think many "deflationists" here and elsewhere would say that "loss of confidence" is an easy phrase to throw around, and it is certainly happening in many areas of modern life, but the critical factors are the rate at which it happens and the specific context in which it happens.

Loss of the confidence in the global financial system for example, or what I may call the "debt-dollar discplinary system", does not necessarily mean an immediate loss of confidence in the dollar as a means of paying off debt and an accepted medium of exchange for hard assets. In fact. it is an absolutely necessary means for paying off much of the debt around the world. So then the means of expressing a loss of confidence becomes a tricky thing, as there are many structural factors involved.

We all agree that the dollar and most fiat currencies will not hold their value in the long-term, so the question then becomes what are the chances that it will hold or increase in value within the next few years vs. the alternative? The difference between hyperinflation within a year and hyperinflation after 3-5 years is actually a pretty huge one for many people, depending on their specific situation of course.

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dbworld
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Re: Don't Be Fooled: Inflation Has The Upper Hand

Does anyone know if history shows that before a currency crisis there is an attempt at auserity and hence deflation? The US hasn't tried austerity, but I feel as though it must attempt it before hyperinflation will happen.

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idoctor
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Re: Don't Be Fooled: Inflation Has The Upper Hand

dbworld's picture
dbworld
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Re: Don't Be Fooled: Inflation Has The Upper Hand

I am shorting gold , oil, 30yr treasuries and japenese yen since 2 days ago.

FWIW - I removed my short on oil, not long after this post when the following site pages were updated.

In the extended forecast, via subscription, through Nov. 2013, I can see that oil peaks at 109, gold deflates to 1060, 30yT yields will still bottom at 3.75 (to early to short), the Yen has peaked at about 82.5. S&P will move down to 940 before moving up to new highs over 1500.

OIL - http://forecasts.org/oil.htm

GOLD - http://forecasts.org/gold.htm

30y T - http://forecasts.org/30yrT.htm

YEN - http://forecasts.org/yen.htm

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Tim777
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" I am shorting gold ,

" I am shorting gold , oil, 30yr treasuries and japenese yen since 2 days ago"


I agree with most of the ideas here-Thank you for very intersting article.
Gold fell short in its run toward $2,000 an ounce this year, but one year’s failure may lead to next year’s success — or at least another good shot at it.

My market strategy in the Gold market ,Oil and in the stock market: just track the smart money movement.
How?

1.I'm tracking the volumes in the stock market everyday.

2. I'm tracking the daily forecasts based on the smart money movement-for example:
Gold Forecast

Crude Oil prediction
Stocks forecast

Good Luck!

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