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One of THE BEST Articles that I Have EVER Read!

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  • Wed, Sep 01, 2010 - 11:30pm

    #21
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    Re: One of THE BEST Articles that I Have EVER Read!

[quote=machinehead]Nor will the US dollar, I assure you. Frown

[/quote]+1

  • Thu, Sep 02, 2010 - 01:07am

    #22
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    Re: One of THE BEST Articles that I Have EVER Read!

Strabes and Machinehead.  thanks for the input and more to ponder…. and Hank Williams is right, none of us will get out of this world alive.


  • Thu, Sep 02, 2010 - 02:42am

    #23
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    Re: One of THE BEST Articles that I Have EVER Read!

I think it should be mentioned that Mish always points to the fact that the entire credit market debt is at or near $52 Trillion. The US National Federal debt stands at $13.3 Trillion.

Mish and other deflationists are talking about credit destruction as money velocity remains under 1.00 and loans are being paid back (deflationary) while new loans just are not being extended for two reasons:

1. very little appetite for debt, consumers and businesses are either saturated with debt or wary about taking on the risk because of uncertainty

2. banks don’t want to lend to anything but AAA rated lenders because they have got all the beta (risk) they could possibly ever need.

people on this site and elsewhere seem to forget how money comes into existence all of a sudden, the banking system creates more than 90% through the fractional reserve banking system. Without banks lending money the fractional reserve system breaks down and heads toward credit contraction.

You have two forces fighting it out right now, the destruction of credit money in one corner and the insertion of high-powered money from the Federal Reserve in the other corner… and the fight isn’t even close. I wish I had the ability, but I would compare M3 (credit money) and M0 (high powered money) on a chart and show you how pathetic the attempts by the Fed are. In a fractional reserve banking system the Fed doesn’t make the majority of the money in the system, the banks do.

The Fed and Treasury and Congress will try with all their might but without risk appetite by both lendors and borrowers the money machine just doens’t work properly. If risk appetite does return with some vigor, then watch out becuase the Fed has put a little too much igniter fuel on the coals.  But I think we all see the reality here… significant economic expansion is a pipe dream, so in my opinion hyperinflation is a pipe dream as well.

On another note.

The possibilty of every country trading in their Treasuries for commodities all at the same time has the same probability as my dog speaking fluent English all of a sudden. ‘Speak Ubu, Speak!’. I think Mish has it right when he says that it would have to be a Shazaam’ moment, if Obama peels back his face to reveal he is an alien, Shazaam, then maybe I could see an exit from the US marketplace all at once. Otherwise, it will be a slow and orderly exit over the course of years and the US dollar will drift into unimportance as another currency gains power.

Conclusion:

Hyperinflation – Very low probability, maybe 2%

Mass selloff of Treasuries – Very low probability, maybe 2%

 

 

 

  • Thu, Sep 02, 2010 - 02:58am

    #24
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    Re: One of THE BEST Articles that I Have EVER Read!

[quote=goes]how would it defend the FED’s balance sheet?[/quote]

the non-state capital institutions/funds (the “market”) control most rates, so the run on Treasuries people are referring to here would be the market forcing higher rates, which is what would threaten the Fed’s balance sheet.  then the Fed’s only option would be to jack up the short rate it controls, which sucks the life out of the current economy (extreme austerity), which pushes money back toward the long-end of the yield curve, i.e. shores up the Treasury market and defends the Fed’s balance sheet.

this is the endgame scenario.  it’s the high-stakes risk point that the global central banks are working hard to avoid.  I hope we avoid it for a while longer.  I hope we avoid it completely as the stabilizing effect of China manages things down slowly over a long period of time.  but given our imperial military quests and lack of self-imposed austerity on welfare/medicare/social sec/etc I don’t see how it’s avoidable unless we change the monetary system from the current central bank model (which serves capital holders vs. the people, as the endgame scenario proves) to a different system. 

[quote=goes]I agree with this but that seem contradictory to what many of the sovereign money supporters believe.  How would you “defend the financial borders”?[/quote]

Nationalize the Fed and gain control of the primary dealers (kicking out the foreign ones, breaking up or nationalizing the domestic ones, or usury laws to prevent capital flight from cranking up the interest rate vacuum machine).  I know this sounds extreme, but that’s the situation we’re in.  The only way to have a sovereign country is to take back control of money.  Otherwise the endgame of nation-states is unavoidable. 

  • Thu, Sep 02, 2010 - 03:27am

    #25
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    Re: One of THE BEST Articles that I Have EVER Read!

[quote=kemosavvy]

On another note.

The possibilty of every country trading in their Treasuries for commodities all at the same time has the same probability as my dog speaking fluent English all of a sudden. ‘Speak Ubu, Speak!’. I think Mish has it right when he says that it would have to be a Shazaam’ moment, if Obama peels back his face to reveal he is an alien, Shazaam, then maybe I could see an exit from the US marketplace all at once. Otherwise, it will be a slow and orderly exit over the course of years and the US dollar will drift into unimportance as another currency gains power.

Conclusion:

Hyperinflation – Very low probability, maybe 2%

Mass selloff of Treasuries – Very low probability, maybe 2%

[/quote]

Although I’m solidly in the short-medium term deflation camp, I think it is a mistake to underestimate the possibility of a major swing in confidence, which is mainly what hyperinflation comes down to. Especially in these uncertain times, hyperinflation may become more of a sociopolitical event rather than a strictly economic/monetary one. GL’s article presents some pretty interesting and unique points regarding the process that will collapse the treasury bubble and cause hyperinflation. If all those institutional investors sitting on mountains of cash and treasuries suddenly see an opening in more risky assets, they could set off a feedback that eventually leads to everyday consumers pulling savings out of the bank and buying all the hard assets they can get their hands on.

My issue with GL’s article is what he assumes will cause this sudden investment shift towards specific commodities that soon leads to a loss of confidence in treasuries. It seems unlikely that a spike in oil price due to an Israeli attack of Iran would be enough to set that process in motion. After all we recently had a significant runup in grain prices mainly due to droughts in Russia, but we’re still in a global deflationary process. I’ve always thought something as signficant as mainstream peak oil awareness would be enough to trigger hyperinflation, but I’m not sure anything less than that would suffice.

  • Thu, Sep 02, 2010 - 04:03am

    #26
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    Re: One of THE BEST Articles that I Have EVER Read!

kemosavvy,

Thanks for your comments. I found them to be the most useful among the lot. Overall Deflation seems the most logical continuation of things. Was just talking to a fellow who had a well dug back in 2006. The price he paid back then was $18 per foot. He says he could now have that same well dug for $10 per foot. I speak to everyone from Doctors to plumbers and the general consensus is that “everyone is broke.” 

  • Thu, Sep 02, 2010 - 08:41am

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    Re: One of THE BEST Articles that I Have EVER Read!

I’m finding this whole discussion to be very helpful and in the best tradition of CM.  Thanks to all.

Doug

  • Thu, Sep 02, 2010 - 09:09am

    #28
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    Re: One of THE BEST Articles that I Have EVER Read!

ashvinp,

I’d like to counter your peak-oil-hyperinflation theory before I drifft off into la-la land for the night.

Just because the value of a barrel of oil is going up doesn’t mean that the price of oil should go up as well. For example, during deflation the value of your dollar goes up while the price of everything goes down. The same is true for a barrel of oil, the value of oil could be reaching all-time highs while at the same time the amount of dollars in circulation is getting less (credit contraction), therefore the price may go down for oil.

The reason I say ‘may go down’ is that you then have to consider which is appreciating more, the dollar or a barrel of oil. My point is that you can still have Peak Oil in times of deflation. hopefully that makes sense.

Steve

  • Thu, Sep 02, 2010 - 11:30am

    #29
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    Re: One of THE BEST Articles that I Have EVER Read!

[quote=machinehead]

Nor will the US dollar, I assure you. Frown

[/quote]

What situation, other than hyperinflation, can decapitate the dollar?

  • Thu, Sep 02, 2010 - 11:42am

    #30
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    Re: One of THE BEST Articles that I Have EVER Read!

[quote=M.E.]

[quote=machinehead]

Nor will the US dollar, I assure you. Frown

[/quote]

What situation, other than hyperinflation, can decapitate the dollar?

[/quote]Hyperinflation isn’t a cause. Hyperinflation is a symptom. Specifically a symptom of a dollar being made worthless.

Since its inception, the Fed has created so many dollars (in conjunction with our politicians over spending) that the value of the dollar has gone down 95%. This happened to the Roman Empire – but it took them 300 years to debase the Denarii that much.

Think of money as something else other than digital and paper. Think of money as if we all got paid in bags of grain. One year there is a bumper crop of grain and you and I have a barn full of it. So does everyone else. It is so plentiful it is worth less and takes 2 barns to buy a house. Then this year there is a dry season and one bag of grain is so valuable that half of it buys a house.

Economics is nothing but supply and demand. Many folks don’t look at the supply and demand with the money.

They will.

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