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A Flood of Money

Monday, October 13, 2008, 8:27 AM

Well, the G7 met and decided that what we needed was, unsurprisingly, a flood of money.  An unlimited wall of new money to replace the money that mysteriously evaporated into the mist of the credit crisis.

I say "unsurprisingly," because this has all been tried before.

When John Law's infamous credit experiment started to unravel in 1720, the French authorities first resorted to decreeing that their failing paper promises were worth more than gold  and silver, and then, upon the almost immediate failure of that edict, to printing as much as necessary to buy out the failing equity and debt issuances upon which the entire bubble was formed.

The whole thing collapsed in rather short order, and the angry, destitute crowds took matters into their own hands shortly thereafter.

Here's how I summarize the news from this weekend:

And I almost certainly missed a few things, because it was a firehose of information.

And the US? $1.5 - $2 trillion total cost for the next year.

So far I have not yet read ONE article that asks the most obvious question of them all, "Where will all this money come from?"

That's it. That's the $64,000,000,000,000 question.

"Where will all this money come from?

It's a pretty obvious question.

So how come nobody is asking it?

Because the answer is the same as it was during the French South Sea Bubble in 1720 - it will be printed up by central banks.

Which raises the uncomfortable follow-up question, "So why is it that we are expecting a different or better outcome this time?

It is a serious question, and it deserves a serious answer.  But it's hard to get an answer to a question that practically nobody is asking....

This is exactly why I created the Crash Course and spend so much time writing this blog and Martenson Reports:  If the people in charge aren't going to ask serious questions and offer serious answers, it is up to us to do this for ourselves.

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69 Comments

ELIZABETH S.'s picture
ELIZABETH S.
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Re: A Flood of Money
Should we expect deflation first? Then inflation? Then hyperinflation?
Gwentan's picture
Gwentan
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Re: A Flood of Money

Can anyone clear a question up for me? 

I can see how the printing presses might run even faster  if no one is willing to lend money to a particular government at a rate they are prepared to pay for it. But what happens if private and institutional lenders around the world are willing to lend to a government that is seeking to borrow? Does this mean they avoid the need to print/create new money?

jdb123's picture
jdb123 (not verified)
Re: A Flood of Money

yes--but 11 of the 13 bullets above are just guarantess of deposits....if they "SAVE" the banking system...they never have to print anything......they just made a promise they can't keep.

However, the EU interbank lending and US debt will demand enough printing out of thin air to tumble the world economy anyway...

James Wandler's picture
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Re: A Flood of Money
[quote=cmartenson]

This is exactly why I created the Crash Course and spend so much time writing this blog and Martenson Reports; if the people in charge aren't going to ask serious questions and offer serious answers it is up to us to do this for ourselves.

[/quote]

I wrote following to an earlier post where I quote below but decided to post my comments here since it is up to ourselves to ask the serious questions and take action:

[quote=hewittr]hewittr said:

For the buy-and-hold long term investor, the safest bet anyone can make is is the complete destruction of fiat currency. Anyone who thinks otherwise, doesn't know monetary history. The price of gold has tripled what it was in 2001 while currencies and financial assets have fallen considerably. And we  haven't seen a mass exodus for safety yet. If I were you, my friend, I would buy some precious metals and keep them on the side as insurance. Because I know some day you are going to need it. [/quote]

I don't necessarily disagree with the merits of owning precious metals but can you point out how many fiat currencies that have failed that were replaced by precious metals versus how many failed fiat currencies were replaced by a new fiat currency? 

In either case at the time of the failed fiat currency the rules governing the relationship between creditors and debtors have to be rewritten leading to a range of "winners" and "losers" (a hard reset or jubilee that Chris has mentioned).  If you are currently a creditor with wealth to protect one strategy is to buy precious metals as a store of wealth and, regardless of whether they are used as a new currency, if you can continue to own them after the rules are reset, then they could hold their value.  Currently some regions of the world do look at precious metals as a store of wealth and should we see a fiat currency collapse, such as the US dollar, the value ascribed to precious metals will simply be that much higher.

After a "hard reset"  there isn't anything wrong with starting again with a new fiat currency.  We just need to look around us at the efficiency of using fiat currency; conducting transactions electronically is the only viable method of conducting a modern world.  However I think that Chris has pointed out, with brilliance, that currency created out of debt that must grow isn't compatible with a world with physical limits - and humanity is now reaching the limits of this physical world.  Chris has briefly mentioned a cash based transaction system - perhaps something like this will be compatible with the physical world - however I expect that this will be a new fiat currency. 

Chris has suggested that the debt based money system is currently running into the constraints of our physical world.  He may be right.  However our current monetary system has accumulated imbalances that was balanced precariously like a house of cards and this was solid as long as we believed it was solid.  However as the imbalances continued to accumulate it took a trigger (US subprime) to force the system to begin to reevaluate itself - and now the system is moving backwards (deflation) unwinding these imbalances - taking with it a lot of innocent parties with it.  

Now we obviously can't store our wealth in a future fiat currency that hasn't been created yet.  In our current deflationary environment money does become more valuable - but needs to be watched vigilantly because its value would depreciate rapidly in a hyperinflationary environment and which seems likely since US is not placing limits on how much borrowing (and debt monetization) that it is willing to do.  Also, not all fiat currencies are equally valuable.

So I agree that precious metals are probably the simplest approach - but cash (but likely not US cash) in a deflationary environment might be the most profitable there are other considerations. 

Paying off debt is Chris' number one suggestion.  Why?  So that you don't lose the underlying asset in a foreclosure.  Another reason to pay off debt is because if cash is becoming more valuable, at say 10% per year, then paying off debt gives you the same return on the money plus the rate of interest.

Cutting expenses is Chris' second suggestion.  Just buying and consuming less is the obvious way of doing this but if you consider all possibilities there are a variety of avenues.  Should you move from a suburban to a rural area if you can telecommute or if you are retired or if you can create employment for yourself in a rural area?  The price of rural real estate may be underpriced compared to its true value as we head towards a world constrained by physical limitations. Why rural?  Not only would you be putting yourself closer to your source of food but it may also be easier to develop a network of relationships when everyone in a community knows each other and therefore there is more accountability for one's actions.

Regardless of whether you move or not you can then consider having your home evaluated for energy efficiency and use your money to implement the changes - more energy efficient windows, better insulation, a geothermal heating/cooling system, woodstove, photovolatics, more energy efficient appliances, more fuel efficient car, etc., etc.  How about having a cold cellar built so that you can store food when it is abundant locally so that you have it when it would otherwise be more expensive.  All of these items lead to sustainability in a hyperinflationary environment, the savings are tax free, protect yourself from your deflation (where creditors fall like dominoes and you are at the end of the chain), allow labour in the economy to be unlocked as your money pays others to do this work and helps reduce the impact of the economic slowdown, and protect yourself from all of the other factors that Chris has identified that are down the road (demographics, peak oil, natural resource limitations).

I'd suggest that readers use Chris' link to Amazon and pick up a copy of Deep Economy by Bill McKibben.  His ideas are great and have a look at his section on complementary currencies.

All the best,
James

Woodman's picture
Woodman
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Timeline?
And what is the potential range in the timeline for deflation and inflation?  days, months, a year or two? 
narco's picture
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Re: A Flood of Money

I think the plan is to print up a ton of Treasuries and Gilts to finance the borrowing for this.

Surely with a flood of new sovereign securities the market is going to become quickly saturated, leading to higher interest rates?

SB2222's picture
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Re: A Flood of Money

So what is the magnitude of the world central banks printing 64 Trillion Dollars worth of currency? Granted more printed currency depreciates its value, resulting in inflation. But is this resulting inflation likely to be absorbed into the world economies in a matter of a few months? 50 years? Never?

Sure, let's ask the question "Where's this money coming from?"... So... various governments print it. So what? We understand the theory that financial trouble can result. But based on what we know and what we can best project, what are those results? What do honest 2 year / 5 year / 20 year / 100 year scenarios look like?

Giving us a sense of magnitude for various likely outcomes would be much appreciated. Granted this is new territory. And prognosticating, versus reading and disseminating historic facts, is more difficult and dangerous - at least to one's credibility -  but we must be able to suggest some realistic scenarios...

Xflies's picture
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Umm, no money is being printed by guarantees
IF there is no run on the banks, there's no money printed to guarantee someone's deposits that they aren't taking out... IF there's no bank failure, there is no money printed to guarantee interbank loans. The gov'ts have put things in place to bolster confidence and the money that the gov't wants to get down into the public's hands is being held up by the banks so the interbank loans are there to ensure each bank that the other bank won't go bankrupt but there is NO money supply creation if these overnight promises don't get called upon. Confidence has momentum, you've seen it rise and especially fall recently... if these moves stop the fall of confidence, then the days and months ahead where there are no bank failures will grow confidence and hopefully, just hopefully we can all see liquidity come back to the markets... who cares if the markets go up, I'm just hoping liquidity comes back. If we do see more bank failures or country currencies going through an increase in volatility, then I'd definitely change my way of thinking but for now, this move is a good move, take it for what it is... re-evaluate, re-hypothesize, observe... Has there been an increase to financial failure over the past few months? Yes. So there's nothing wrong to prepare for the worst but don't let it affect your ability to see what's before you today.
cmartenson's picture
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When does a guarantee turn into printing?

My sincere view is that we fundamentally have a crisis of solvency, not liquidity.

That is, most of the world's banks are insolvent and many should be bankrupt.

Thus, a guarantee of deposits is the same as a guarantee of the bank's solvency.  That is, the 'cost' of the deposit guarantee will equal, more or less, the amount by which any given bank is insolvent.

Conclusion: A guarantee of deposits is the same as printing to the extent that the banking system is insolvent.

As we 'delverage' from 40 or 50 to 1 back to, say 12 to 1, my estimate of the degree of insolvency is in the trillions of dollars.

jdb123's picture
jdb123 (not verified)
Re: When does a guarantee turn into printing?
points well taken....and lets be honest--we WILL see dozens and dozens of bank failures in the coming 15 months even if their plan does "work" this will require these guarantees to pay out ( I.e.--Print money )
Xflies's picture
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Bank Solvency vs Liquidity

Good point but my only point is that what we saw happen over the weekend was a positive event.  If the view that banks are insolvent, there's nothing anyone can do anyways and everyone should rush to the banks to get their money out.  That hasn't happened just yet, when it does, I will re-evaluate but what just DID happen is a good thing, not a bad thing.  What is the actionable outcome?  Well, it could mean to buy the rally, it could also mean to be nimble and take profits on any bounce but this whole mess came out of leverage, complacency and a misunderstanding of risk.  Could the average peasant be complacent still and trust that his money is safe in the banks because the King has said it is so?  Ummm, well yes, they just might believe it.  Could that mean that the markets look oversold for the short term and that one could make 10-20-30% off realizing that?  Ummm, yes it could... While I may agree with your longterm outlook, I am just saying that there are ways to make money and help you better prepare for the final outcome but only if people see the data points as they come out for what they are.  Guaranteeing interbank loans made sense, if they didn't, we'd be in a lot more trouble and I would have reacted to that so while it may be seen as the obvious thing to do, the actual action did mean something.  We'll just have to see if it helps, things are so fluid these days that anything can happen but I think you'll agree that despite your views on solvency, guarantees don't mean printing money unless a guarantee is called upon which won't happen until the bank runs out of money and has to dip into these guarantees.  My guess is that before that EVER happens, that there will be a banking holiday anyways... when the banks get to 50% of their deposit base, they'll just do something else and there will be plenty of time to watch what unfolds when the banks and reports come out from the press that bank deposits are falling.  I mean plenty of time by a day, or even hours to liquidate everything... your financial position is always in respect to the size of your portfolio versus the liquidity of the markets...

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Re: When does a guarantee turn into printing?

Chris,

Do you still think we'll experience a period of deflation before the eventual inflation and hyperinflation that seems inevitable with the recent increase in Monetary Base and the central bank guarantees?  If so, what's your best guess on how long that deflationary period might last?

People like Mike Shedlock at Mish's Global Economic Analysis are absolutely convinced we're headed for deflation. However, there are several other analysts who seem to believe that the monetization of debt that is happening now will take us to hyperinflation very quickly.

What's your opinion? 

Ray Hewitt's picture
Ray Hewitt
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What is money you can trust
I don't necessarily disagree with the merits of owning precious metals but can you point out how many fiat currencies that have failed that were replaced by precious metals versus how many failed fiat currencies were replaced by a new fiat currency?

Theoretically, paper is just as good as gold as a medium for money. Here's the catch. For whatever form money takes, to be viable it must be both a practical medium of exchange and a store of value. To be a viable as a store of value, the supply must be stable. Gold has endured though three millenium because it is difficult and expensive to mine. Paper is limted by the size of your forest.

Without exception, every government that took the path towards monetary debauchary ended up destroying it's currency. Before paper money, the Romans would shrink the size of their coins and reduce their alloy content. So again, the issue is not paper verses gold; it's an issue of supply. All boom and bust cycles attributed to a weakness of capitalism are in fact an outgrowth of the expansion and contraction of the money supply.

In past inflations, governments have tried issuing new currencies with the zeros dropped off. Sometimes they have a temporary effect of quenching inflationary expectations. But once the public senses that their government is inflating the new currency, it begins another round of price increase. We may see attempts at replacing the dollar with a basket of currencies or a new currency like the proposed Amero. I would see it as a ruse to keep the public fooled. It will fail too.

When our government makes a credible promise at minimum to abolish central banking and fractional reserve banking, then we can have confidence they have abandoned their means of inflating whatever new currency takes its place.

See http://en.wikipedia.org/wiki/Hyperinflation

 

Ray Hewitt's picture
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Worse Deflation AND Inflation to come

Yes deflation is the strong force now, but inflation has not exactly gone away either. Now that authorities have taken the position that there is no lmit to the supply of money they are willing to create, this presents a new dynamic. I would be looking for both deflation and inflation to increase in intensity. This truly has the spector of an event of biblical proportions. These nation-states are fighting for their lives and they are  going to take masses down with them.

So now I see two reasons to get out of debt. 1. Interest rates are sure to increase. 2. You'll need the extra cash for much higher prices to come in the near future. I don't plan to use my silver until I absolutely have to.

bearing01's picture
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Asset Decline is not Deflation

I think a lot of people have confusion with Deflation, Inflation and asset pricing.

Stock market decline and/or a fall in the price of equities, or real estate, or gold, is NOT deflation.  It is a decline in the asset price.

Deflation = a contraction of the money supply (the Fed's balance sheet).

Inflation = an expansion of the money supply.

The Fed has been expanding the money supply at unpresidented rates.  Just look at Chris's hockey-stick graph of the M3 money supply.  Yes, right now we have a correction in the market where assets are being repriced, but this is not reducing the amount of money in the system.  After the dust settles and all this new money circulates through the system we will have more dollars chasing after the same number of goods & services.  The effect will be a rise in the price of goods & services.

ninakat's picture
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Re: A Flood of Money
Yeah, but what about Biflation? Undecided
spilddanmark's picture
spilddanmark
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Re: A Flood of Money

Excuse my terrible grammar

joe2baba's picture
joe2baba
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Posts: 807
Re: A Flood some important terms

> >Stock Market Definitions
> >
> >
> >Due to today's rapidly changing stock market and the financial
 conditions in industry, the following terms have had to be revised for
 investors in order to more clearly reflect today's economic market place:
> >
> >CEO -- chief embezzlement officer.
> >
> >CFO -- corporate fraud officer.
> >
> >BULL MARKET -- A random market movement causing an investor to
 mistake himself for a financial genius.
> >
> >BEAR MARKET -- A 6 to 18-month period when the kids get no
 allowance, the wife gets no jewelry, and the husband gets no sex.
> >
> >VALUE INVESTING -- The art of buying low and selling lower.
> >
> >P/E RATIO -- The percentage of investors wetting their pants as the
 market keeps crashing.
> >
> >BROKER -- What my broker has made me.
> >
> >STANDARD & POOR -- Your life in a nutshell.
> >
> >STOCK ANALYST -- Idiot who just downgraded your stock.
> >
> >STOCK SPLIT -- When your ex-wife and her lawyer split your assets
 equally between themselves.
> >
> >FINANCIAL PLANNER -- A guy whose phone has been disconnected.
> >
> >MARKET CORRECTION -- The day after you buy stocks.
> >
> >CASH FLOW -- The movement your money makes as it disappears down the
 toilet.
> >
> >YAHOO -- What you yell after selling it to some poor sucker for $240
 per share.
> >
> >WINDOWS 2000 -- What you jump out of when you're the sucker who
 bought Yahoo @ $240 per share.
> >
> >INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in
 a nuthouse.
> >
> >PROFIT -- an archaic word no longer in use.
>

i dont know about anyone else out there but i really needed a laugh

om shanti

joe

Ray Hewitt's picture
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Re: Asset Decline is not Deflation

bearing01 said:

Deflation = a contraction of the money supply (the Fed's balance sheet).
Inflation = an expansion of the money supply.

From an economists viewpoint, I agree with your definition. The general public looks at inflation and deflation in terms of price.

The supply of money does not necessarily correlate with prices because of other dynamics. In this case, wages have not kept up with price increases of staples, and there is nothing on the horizon to suggest that will change. I see foreclosures and bankruptcies continuing to increase as consumers get squeezed with higher prices for essentials. So yes the money supply will expand dramatically - and so will the fall of financial assets including real estate. By the time fo the bottom of the credit collapse, consumers will be lucky to have enough cash for basics.We think along the same lines.

 

Art Shulenberger's picture
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Re: A Flood of Money

A possible, simple first step in the right direction.

Governments could rule that Credit Default Swaps are actually insurance, and, as such have been entered into unlawfully.  They could establish protocols to simply reverse the purchases of CDS' and set refund requirements.  This would reduce existing leverages.

Also, going forward, CDS would be replaced with Credit Default Insurance (CDI) that could only be purchased by the debt holder up to 80% (for example) of the value of the debt and would have to meet insurance reserve requirements and be issued by an institution independent of the original debt instrument. 

rlee's picture
rlee
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Re: A Flood of Money
[quote=cmartenson]

Which raises the uncomfortable follow-up question, "So why is it that we are expecting a different or better outcome this time?

[/quote]

Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”.

Well Chris, it's because we are being led by insane people.

Bob 

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Re: A Flood of Money

 

 I want to thank you Mr. Martenson for your Crash Course and this website.

 Inflation and deflation are opposites, inflation is caused by an increase in the money supply and deflation is a decrease in the money supply. You can't have both at the same time. Housing and stocks are in a bursting bubble so of course they will have to come down to market levels but this is not deflation in regard to the money suppy. In fact they would be lower in price right now if it wasn't for inflation. I have seen many people say that when the price of fuel goes up that this causes inflation, no, inflation caused the increase in fuel price. This can be proven by the fact that you can still buy a gallon of gas for a silver quarter or a suit for an ounce of gold, approximately.

 People are asking whether we will have inflation or deflation, with the exception of housing, stocks, and fuel, almost everthing else will go up in price. Fuel is lower now due the demand decrease but inflation will bring it up again. I'm not sure about hyper-inflation but with all the newly created financial instruments (I don't like calling it money) we definately will have inflation.

 

 

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Re: Asset Decline is not Deflation

A small correction that makes the world of difference.

Deflation is a contraction of the money supply AND credit.  Mish does great work on explaining what inflation/deflation is and what it is not.  http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-is-it.html 

While the Fed has been printing money, they are not doing so fast enough to keep up with deleveraging and falling housing prices.  Here is a simple example of how falling housing prices results in delation:

You bought the home for $500k in 2005 at 100% financing - That's 500k in credit created.  The price of the house has now dipped to 400k.  You sell, the next person to buy finances 100% at 400k (Let's not even get into how this level of leverage isn't an option anymore).  Net result, -100k in credit and you've just had deflation.  Let's not even get into what happens during a foreclosure or when a bank writes down a rotten mortgage backed securities.  

So yes, your bag of groceries has gone up $30 a week in the past year.  But this is pennies in comparison to the effect of falling home values.  Deflation is here to stay.

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Re: Asset Decline is not Deflation
[quote=hewittr]

 In this case, wages have not kept up with price increases of staples, and there is nothing on the horizon to suggest that will change. 

[/quote]

It's not on the horizon, deflation is here and now.  Falling commodity prices, falling energy prices, falling house prices, reduced credit and tighter credit standards.  All these are the definition of or the effect of deflation.   

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Re: A Flood of Money

Printing of money to bailout banking institutions does not mean hyperinflation. Consider that banks and other lenders are being much more prudent lenders. They are unlikely to offer no-money down mortgages, nor will they loan money to folks will less then stellar credit. The capital provided by gov'ts will be used to payback bond holders, who for at least the short term will be very finicky about financing risk investments. Much of the money that financed the credit boom originated from people that had full trust in their bankers. That trust has been wiped out.

Most Consumers are loaded up with debt and have little or no savings to draw from. They can't not spend what they do not have. Its very likely that for the next year deflationary forces will remain strong. As consumers have already cut back on spending, product inventories are piling up and factories are being idled or shutdown. This means that there will be much higher unemployment soon. Businesses will shed jobs until they can sell off there inventories and until production declines to meet consumer demand.  Higher unemployment means less money being generated and heighten anxiety among consumers, fearful of job loss. 

 For the past five years, Consumer demand and factory production was paid using credit made available for the housing bubble. Consumer used Home equity loans to finance spending and an increased demand for homes and commercial real estate created millions of jobs. Now both of these sources for capital and jobs is gone.

No matter how much money ends up in banking institutions, it won't re-inflate the economy. For the economy to begin growing again, Consumers need cash to spend and access to easy credit. Its very likely that deflationary forces will remain for a considerable period (years)

 On the flip side, the gov't has to also bailout non-financial companies that are also deeply in debt and have double digit sales declines. Major manufacturers like auto manufacturing and Major Consumer services like airlines cannot remain solvent unless they operate near full capacity. Margins for these types of businesses have been razor thin either because a excessive capacity or global competition that leaves them no room for an significant recession.

We also could be facing a shift of monetary power away from the US as the dollar losses it status as the worlds reserve currency. I think over time more and more countries will accept payment in non-US dollar for international trade, which will erode the value of the US dollar in international markets. The US dollar is utterly dependant on international support to remain as a strong currency. I doubt very much that there would be a dramatic, rapid change away from the dollar, but over a period of many years.

FWIW: I expect deflationary forces to remain strong over the next year as businesses continue to shed jobs and consumers will have access to credit to finance their spending. Over time I think gov't will find ways to put money into consumers hands and ease lending restrictions. The big bailouts and printing today will probably take years before it shows up as higher inflation. As long as credit to consumers and business remain constricted, deflationary forces will like win out.

Over the long term its likely that we will be heading for hyperinflation. More and more voters will demand more gov't services (especially in a bad recession). Voters are becoming accustom to voting for politicians that will hand them free money and this path leads to hyper-inflation.  

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Re: Asset Decline is not Deflation

jgreco

There is a time lag of about a year or two from when changes in the money supply work their way up to the consumer price level. We know that the central banks have announced intentions to expand their respective money supplies without restraint.

I try to get away from that either/or way of thinking. There are degrees of both thoughout the economy. Yes it is true that the prices of falling assets are stronger now. I don't see prices fall in the cost of food, and my electric company hasn't droped rates.

Keep your eye on the money supply statistics.

PS, I agree with Mish with the qualifier that the deflation is not absolute. This will not end in a deflationary depression and a strong dollar as in the 30s.

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Re: A Flood of Money - not necessarily inflationary?

If the central banks leave all this money in the system, I can see why it could/would be inflationary. But surely that's only if they leave it there.

 As I understand it, the vast majority of this 'flood of money' is loans to ease liquidity. Can't the central banks take it back out of the system (metaphorically burn it) once it has done its job and the loans are repaid, thus reducing hyper-inflationary risks?

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Re: A Flood of Money - not necessarily inflationary?

Can't the central banks take it back out of the system (metaphorically burn it) once it has done its job and the loans are repaid, thus reducing hyper-inflationary risks?

Monetary Inflation is a one way street. Because it causes consumers and investors to confuse price for value, it makes you think you are wealthier than you really are. As a result, it picks up all kinds of imbalances that accumulate with time. The bailouts shift capital from productive activity to non-productive activity. Without ever increasing sources of money, the non-productive entities would fall like a stone.

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DavidP
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Joined: Jun 3 2008
Posts: 6
Re: A Flood of Money

Did you guys happen to see the market this morning? Wow, finally this emergency is over <just messing with you>.

Chris, you may have been asked this previously but are you the voice of Jack from Jack in the Box fame? If so, that would explain how you know so much. The head on that guy...

Sorry, I was just a little giddy from the market today. I still have a few stocks left.

Thanks again, Chris for the informative blogs and crash course.

 

<ps...the site is now amazingly fast>

GDon's picture
GDon
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Posts: 86
Re: A Flood of Money

James -

You raise some good questions and other valid points, but I would take some exception:

"After a "hard reset"  there isn't anything wrong with starting again with a new fiat currency. "

I disagree.  Fiat currency, by definition, relies upon the empowerment of government bureaucrats to "manage" the financial and market mechanics.  IMO, there is definitely something "WRONG" with that, given a) their propensity for profligate "spending-for-votes", and b) government's despotic conflicts of interest which exist when "rulemakers" are also "marketmakers". 

Combining politicians with bankers, and bankers with politicians, with government laws written for their mutual protection (and the public's fleecing) is a BAD combination - certainly some will lose at the whim and capriciousness of others, depending upon one's level of government party empowerment.

More insidious, given the complicit desire of politicians to "spend-for-votes", and molopoly-holding banks desiring the interest payments which come with that spending, the REASON that no fiat-currencies have failed to fail, is that they DEVALUE the currency, driving up prices for the citizenry.   The politicians, bankers and first-tier recipients of this "thin-air-cash", get the benefits, at the expense of the savings of the general populus - i.e., inflation's "hidden tax".

It is this continuous inflation which is the reason for Americans now REQUIRING two-incomes, where one used to suffice in the earlier 200years of our history - inflation destroys the middle class.

SO...there is MUCH WRONG with "....starting again with a new fiat currency."

You can still have a world with electronic transactions - you just shouldn't allow for governments to decree the value of a currency (paper or electronic) BY FIAT.  Rather, it should still have the natural constraint of MONEY, (not currency), in that the currency is backed by something of immutable, and "pre-paid-for", which cannot be expanded (devalued) BY FIAT.  Gold has served this purpose for thousands of years, and would do so successfully again.

 

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GDon
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Re: A Flood of Money - not necessarily inflationary?

The inability of the debt-holder to repay (an IOU) IS the problem.

The debt-holder has nothing of true value to repay with.

So the debt gets "repaid" only in theory, and with currency/credit created "out of thin air".

This is exactly equal to having an IOU owed you, "paid" by your borrrower, when he writes you a NEW IOU.

Now you have 2 IOU's.

That is inflationary.

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GDon
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Re: Umm, no money is being printed by guarantees

Umm.. I disagree.

The Banks have insufficient assets on the books, to cover their debts, at the current fractional-reserve requirement.

If they need Goverment backing, they are technically insolvent (not enough assets).

The "money" (actually "currency") is coming from a promise of Government taxation (since they have no real assets "on hand").   This currency is printed "out of thin air", to add to the Bank negative asset balance.

There may not have been "runs" on banks (yet), but a "Bank Run" is just the instantaneous "mark-to-market" which displays the inadequacy of their balance sheet.

So...yes - there WILL be "money" (currency) printed.  It will be printed to guarantee not "deposits" per se, but Bank "assets".

Your labor and energy, have been promised by your Government, to cover the printing of currency, which will go to make up the shortfall in failing Bank assets and balance sheets.

AND, there is interest due in addition to those funds.

Print, print, print.

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xpanda
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Re: Umm, no money is being printed by guarantees

[quote=GDon] The "money" (actually "currency") is coming from a promise of Government taxation (since they have no real assets "on hand").   This currency is printed "out of thin air", to add to the Bank negative asset balance. [/quote]

Since the ECB has no taxing authority, and since they are guaranteeing interbank loans with US dollars, does this mean that the US taxpayer is ultimately on the hook (via debasement) for the ECB's promise?

If so, this is starting to smell like the Treaty of Versailles to me...

Tanya. 

 

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machinehead
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Posts: 1077
Money is being printed ALREADY, with or without guarantees

Those discussing the contingent nature of guarantees ("maybe no money will have to be printed") need to review the Federal Reserve's H.4.1 release every Thursday night.

ALREADY, the Fed has expanded its balance sheet from $900 billion to over $1.5 trillion in a few months. ALREADY, the Fed has blown up the monetary base by 16.7% in the past four weeks.

And that was BEFORE the new round of "unlimited dollar swaps" announced this weekend.

I don't even want to look at this week's H.4.1 report. But after a stiff drink, I'll probably -- guiltily -- go there, feeling like a voyeur at a bloody car wreck. It's sick to get excited by all the flashing red bubble gum lights. But Weimar Ben's an ace with the Jaws of Life, and the horribly mutilated banksters inside the car are screaming and pounding the windows.

On second thought, maybe I'll just let Chris sanitize it for me. I would feel too dirty, peeking at that ugly stuff.  Embarassed

robk's picture
robk
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Q: Are we actually PRINTING money?

Question:

Is the Fed really "printing" money?  Or are they just activating bits/bytes in an electronic system somewhere?

And, does that make a difference?

Ray Hewitt's picture
Ray Hewitt
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Posts: 458
Re: A Flood of Money
But what happens if private and institutional lenders around the world are willing to lend to a government that is seeking to borrow? Does this mean they avoid the need to print/create new money?
Domestic loans to government do not add to the supply of money, but foreign sources do. This has two other effects. First the money loaned to government crowds out domestic borrowers depriving them of capital. Second, foreign creditors use US bonds as a base for expanding their own money supply by some multiple of the base.
Ray Hewitt's picture
Ray Hewitt
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Posts: 458
Re: Q: Are we actually PRINTING money?
Is the Fed really "printing" money?  Or are they just activating bits/bytes in an electronic system somewhere?
Central banks used to literally print money in excess. Now it's a metaphor for bits and bytes.
pir8don's picture
pir8don
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Posts: 456
Re: A Flood of Money
[quote=GDon]

.  Gold has served this purpose for thousands of years, and would do so successfully again.

 

[/quote]

Am I wrong? Gold and Silver have little intrinsic value outside of an agreement between people that they can be used to facilitate trade. Without the agreement? Can governments ever again bind us to these substances? - I doubt it very much. We can't eat them and surely our (immediate) future is being very hungry - to put it politely.

People in the northern hemisphere are "paid" to pump oil into tankers, some come to our country where the oil is used to power machinery and make fertiliser and deliver food to our supermarkets (down under). What happens when those people (pumping oil) aren't getting any value for what they are doing? I think I know.

Don

 

 

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bearing01
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Posts: 153
Re: Q: Are we actually PRINTING money?
No, "Printing money" is a figure of speech.  They are transferring dollar credits to someone's bank account.  Just like when you go to the bank machine, it says you have $10,000 in your account.  That is the liability the bank has that it owes you.  There is no money in their vault with your name on it.  However, you can go use your debit card at the grocery store and transfer some of your dollar credits to the store's account in exchange for your food.  Therefore, it doesn't matter.
bearing01's picture
bearing01
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Posts: 153
Why Bank Bailouts do cause inflation...

So, the burst credit bubble has caused many to default on their mortgage.  They defaulted and the bank looses cash from their balance sheet in the process.  The gov't injects cash into the bank to keep them afloat.  Some think that money doesn't leave the bank because the gov't essentially paid the bank for the defaulter's shortcoming.  It is incorrect to think the expansion of the money supply during this process does not create inflation.  Why?

Think of it this way... money is a claim on labor.  If I do work to make a product or perform a service I earn money.  I first contribute to the economy to produce something that competes with other goods & services, thus keeping the price for that good or service low.  Because I have now earned it, I can spend my earnings on something else.  As Chris M. says, credit is a claim on future labor.  Someone has the cash today to go buy goods in competion with those with earned money.  More money chasing the same number of goods (because the guy with the loan didn't contribute a product or service yet) raises the price of that good/service.  This is when we notice what most of us call "inflation".

When you buy something on credit, your free money has won the competion to buy that good.  It is now your obligation to produce a product or service to contribute to the economy.  This produces something new that money can buy.  If you default on the loan and the gov't bails you out by injecting cash into the pocket of the lender, your contribution of a good or service goes unpaid to the economy.    The bank's balance sheet becomes whole again and able to lend out more money to compete with a fewer goods.

 The asset price decline you see today is not deflation.  It is a correction to the false economy that has grown beyond its means due to an inflated money supply.  My savings are still in my bank account.  I can go take out as much of my own savings as I want to go buy whatever I want.  There is no restriction on my savings.  The restriction of credit is causing less demand for goods that people haven't yet earned the right to buy.  It is this bursting of the credit bubble that is causing a correction in the economy and less demand for goods. 

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joe cissell
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Re: A Flood of Money
I think so.  The world will not stop needing goods and services.  Moreover, I believe all goods particularly those which have restricted supply potential must float up as the tub of money grows higher.  More money chasing the same or maybe fewer goods and servies equates to inflation.  As far as the hyper part ask Ben.
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gregroberts
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Posts: 1024
Re: Q: Are we actually PRINTING money?

 "Since October 1, 1877, all U.S. currency has been printed by the Bureau of Engraving and Printing, which started out as a six person operation using steam powered presses in the basement of the Department of Treasury. Now, 2,300 Bureau employees occupy twenty-five acres of floor space in two Washington, D.C. buildings. The Treasury also operates a satellite printing plant in Ft. Worth, Texas. Currency and stamps are designed, engraved, and printed twenty-four hours a day on thirty high speed presses. In 1990, at a cost of 2.6 cents each, over seven billion notes worth about $82 billion were produced for circulation by the Federal Reserve System. Ninety-five percent will replace unfit notes and five percent will support economic growth. At any one time, $200 million in notes may be in production. Notes produced in 2002 were the $1 note, 41% of production time; the $5 note, 19%; $10 notes, 16%; $20 note, 15%; and $100 note, 9%. No $2 or $50 notes were printed in 2002."

  It would take a long time to print 2 Trillion dollars at this rate, remember a trillion dollars is over 67 miles high when stacked on top of each other in $1000 bills.

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Xflies
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Posts: 157
Re: Why Bank Bailouts - you're forgetting one thing,

Debt and money creation can be returned by either an ever expanding economy OR a default of debt.  The fact that bailouts are done at pennies on the dollar implies that a portion of the debt used to create all of this expansion is being defaulted on.

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Xflies
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Posts: 157
While many of you are arguing which Amish community you want
to live by and how much gold you should buy, I've made a nice tidy sum on the rebound in markets and currencies.  These same people will say that I am playing with fire, lucky... and a host of other accusatory things but in the end, I am just as bearish as the average person on this site but I also see an opportunity in making money in the meantime.  I implore everyone to stay objective... recognize that attempts at long term trends is a useful exercise but that does not mean that there are not opportunities in the short run.  The simple data point I was looking for was from the G7 meetings, and it was positive.  The next data point that is just on the horizon is the price at which the TARP program will start buying assets at.  A high price will make the markets rise but inflation more likely and a low price will likely make the markets fall but the risk of money supply increases will drop because there is a better chance that the gov't will be able to make back its investment.  In the background there is also the currency volatility to watch for as other key datapoints because that will represent a potential hiccup to overall confidence if a currency or futher bank failures come to fruition.  It's great to have Chris give us the tools to make good investment decisions and raise overall awareness but it's only good if it is used in conjunction with all of the other 'tools' you have to make good, objective decisions.  A great example is this debate on physical gold... no one sent me an email asking for more information and none of the people who claimed there was a big conspiracy over gold have made comments... do you think they are prepared to change their mindset with the new evidence being offered?  I hope so... but me thinks not.
Xflies's picture
Xflies
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Posts: 157
What is the journal entry offsetting the H.4.1 increase?
If the Fed has expanded its balance sheet so much, what is the journal entry for the otherside?  If they have prefunded TARP, then there is an offsetting liability that is now in TARP and awaiting deployment.  If it isn't and it has been to prop up short term ie. overnight credit markets, then because those assets cycle over such a short term, can't it deflate just as quickly? 
mzsmith's picture
mzsmith
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Posts: 1
Re: A Flood of Money

deflation first... then inflation...

Can't see this happening. By definition (at least my understanding)

AMS - actual money supply (notes, coins, deposits etc..)

Deflation - decrease in the AMS. In a deflation period the value of money goes up.

Inflation - increase in AMS. In an inflation period the value of money goes down.

Depression - referes to a slow down of economic growth

We are headed (or are in) an inflationary depression.

Can't see deflation getting into the mix when the US is printing all this cash and dumping it into the system.

m.z.

Ray Hewitt's picture
Ray Hewitt
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Posts: 458
Re: While many of you are arguing which Amish community you want

Xflies

If you can prosper by trading, more power to you. Most people lose badly at it - including me. I started accumulating silver on the dips about five years ago and doing nicely, thank you. I have no issue with government suppressing the prices of gold and silver. These  prices are so cheap, I kept on buying until I can't buy anymore. Now I have a year to pay off that 2% APR loan. The banks are practically giving money away.

Xflies's picture
Xflies
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Posts: 157
Re: While many of you are arguing which Amish community you want

I hear you... I shouldn't have been so rash with my comments.  I also didn't mean to sound like a Day Trader (nothing wrong with that either).  My portfolio probably turns around 6x a year on average.  What I really wanted to emphasize was the whole issue of objectivity and the application of the Scientific Method... make a hypothesis, maybe make an experiment or two, or do some due diligence, make observations... if the hypothesis doesn't match the conclusion, wash rinse and repeat. 

 Great trade on silver, I am long silver, short gold.  I am also long the markets in a different type of way.  I isolated liquidity by buying commodity related stocks which have been sold beyond fundamental moves in the underlying commodity and shorted the commodity.  Over the medium term I do not have much price risk since I am hedged and I am long more market liquidity.  For example, I am going to go long YRI (TSE) and short GLD (US gold etf) and I am long ECA and short OIL (US Oil etf).

Reuben Bailey's picture
Reuben Bailey
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Joined: Mar 17 2008
Posts: 138
Re: While many of you are arguing which Amish community you want

More power to you for being able to make money in the current environment - just remember that a strategy works until it doesn't.  You may also want to take a step back and consider the evidence that Chris presents here through a broader lens than you posts imply is your usual one. (I have not read the postings/debate over physical gold.  I am speaking about the general flavor of many of the posts of yours that I have read.)  I have not read anything that Chris has written that has said that there is no money to be made, just that the risks are especially high right now and that the first priority should be to get yourself various forms of insurance.  After that, if you have the stomach and resources for making money in the market, go for it. 

There is also nothing wrong with sticking to long term trends.  I know of one man who gave newsletter readers his "trade of the decade" back around 2000, which was "buy gold on the dips, sell stocks on the rallies."  The first part of his trade has gone pretty well, up 3-4 times since then.  The second part has not gone so well in nominal terms until the last year, but, adjusted for inflation, he has been spot on with both sides. 

Best of luck to you.

Reuben Bailey's picture
Reuben Bailey
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Joined: Mar 17 2008
Posts: 138
Re: A Flood of Money
My memory of Chris's definition of inflation and deflation is not just the AMS.  I remember it as being basically measured by the old M3 statistic, which is all forms of money and credit.  The current deflation is being caused by huge amounts of credit disappering through de-leveraging.  Inflation will take over when the amount of liquidity (cash/credit) being pumped in by the monetary authorities overcomes that process.

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