Hyperinflation or continuing Deflation??

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WorkinStiff's picture
WorkinStiff
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Hyperinflation or continuing Deflation??

Hi! Joe Sixpack here.....Love the site...Just finished the "Crash Course"......My question comes from opinions of an investor named Denninger who runs the Ticker Forum.....He has quite a following and correctly called the events of 08 in Dec 07 & his 09 predictions, made in Dec 08,  are, so far, spot on.......He says that the "Hyperinflationists" have it wrong...That Debt is inherently deflationary and that there has never been a case of hyperinflation in a country who's debt was denominated in IT'S OWN CURRENCY.......That US debt is denominated in dollars as is/was the debt in Weimar Germany, Argentina & Zimbabwe....He says that inflation has never been accompanied by declining housing prices & that with skyrocketing unemployment and a huge oversupply of homes, the value of houses has nowhere to go but down and he expects that the values of other capital goods to decline for the first time since the 30s....Another factor is that things are even worse abroad. that "while we're screwed they're gonna be gang raped"..He predicts that the value of the dollar will continue to rise vs most other currencies possibly achieving  a one to one ratio vs the Euro & pound......What say you guys???

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Re: Hyperinflation or continuing Deflation??

I say that you sound like you know more than me.

I also say that increasing oil prices are going to cause massive inflation.  And you have not accounted for that.  Every single commodity pretty much is dependent on oil right through its creation to transport. 

I also rekon interest rates will go up to combat this inflation.  What say you guys ???

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Re: Hyperinflation or continuing Deflation??

If you subscribe to the idea that inflation and deflation can be defined in terms of available money and your money includes both cash and credit, then we are in deflation. Presumably we can be deflating as long as credit is shrinking faster than new money is being "printed". As long as the new money is confined to the balance sheets of zombie banks it won't cause inflation. When it eventually gets lent out into the economy it will cause inflation.

 The inflation/deflation situation is more complicated than just the technical definitions would imply. Neither inflation nor deflation must occur uniformly throughout the whole economy. In addition inflation defined as above is not cleanly related to price stability. AmanaPops made this point clearly. The bankers may think that we are in a depression, but the rest of us are going to bear the brunt of increasing prices and taxes.Every tax that I pay, all utilities, insurance rates and groceries have increased in price in the last year. Only fuel prices have decreased recently, but only an idiot thinks that will continue.

Stan

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WorkinStiff
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Re: Hyperinflation or continuing Deflation??

Hi Amanda!...I Don't know more then anybody about much of anything....Oil prices have been a freefall these last few months as demand has fallen...I believe I read that the huge runup last year was due largely to speculation & market manipulation....If we suddenly reach the point of a catastrophic oil supply collapse then the price of most everything will certainly rise dramatically, but I think with declining demand that day is pushed a little farther down the road ..Wouldn't rising interest rates lead to more deflation as less people would be able to afford to buy things on credit?....With fewer dollars chasing goods, won't the value of those goods decline?...Denninger believes that the American consumer is shellshocked and very reluctant to borrow now & that personal savings will increase dramatically among those who still have incomes.....

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Re: Hyperinflation or continuing Deflation??

I am starting to come around to this line of thinking that we will continue to have deflation in asset prices for several years.  However, I think we will eventually have inflation in necessities like agricultural products and possibly oil.  Since we have a huge unwinding of debt, anything that is usually bought with debt will have to drop in value.  Things bought with hard currency, like food, will go up because our currency is being massively devalued and the world economy is growing and will need to eat no matter how bad the downturn is. 

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WorkinStiff
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Re: Hyperinflation or continuing Deflation??

Hi Stan....I hope that my attempt to ask questions and get divergent opinions doesn't make me an idiot....I can't afford to lose what brain cells I have remaining....
I'm in with a group of folks who are setting up a "survivalist retreat" in the wilds of Oregon...I recently purchased a large fifth wheel for folks to live in if/when it all goes to hell...It's now on that property...I had been looking at fifth wheels for over a year and was able to score this one for about 50% of what it cost 1yr ago...I've also been looking for an economy car & motorcycle, (already got a bike) & have noticed price declines over the last year in autos & motorcycles as well.....So I think that Denninger's prediction of deflation in capital goods may have some validity.....
I believe that recently, not just oil, but all commodity prices, ( save PMs) have declined.....I recall reading that during the deflation of the first great depression, that prices of some foods spiked occasionally due to shortages.....
I try not to get emotionally invested in debates over say, deflation vs hyperinflation as I'm already emotionally invested in trying to learn, prepare & survive....I believed in hyperinflation, and bought alot of PMs, but Dennniger's arguments have me wondering...So far he's right.....

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Re: Hyperinflation or continuing Deflation??

This is a US view...

 The US bank bailouts are not likely to be inflationary because equity investments in banks by the US government simply ensured that their balance sheets were, well, "in balance".  This is because the toxic assets could not be priced, no one knew what they were worth and they might be worth zero.   Having said that, the US government basically bought stock in the US Banks in order to be sure liabilities were not greater than assets (ie: Insolvency).

The stimulus plan however, as well as certain acts by the Fed, will put more money into circulation.  Will this be inflationary?  You bet, because at the same time more money is being put into circulation, all the manufacturers around the world have been curtailing production.  Which means that there will be shortages when people try to spend their new found money.

 Inflation = too much money chasing to few goods.... price goes up. 

 

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Re: Hyperinflation or continuing Deflation??

Hello,

 

I would just like to point out that the concept that debt is by nature deflationary is somewhat profound from the above poster. This really starts to make sense that all things that require credit will likely deflate in price, yet the velocity of money from the new money that is being created will perhaps be directed towards non-debt items like food and all other things that find their existence from oil; hence we will have deflation of prices with some asset classes like houses and cars, commercial real estate and other debt items as we continue to deal and resolve our debt issues, yet increased prices in other areas.

 If we start to have problems servicing our nations debt due to lack of confidence from the world investors or due to other countries having even worse problems then us and perhaps not being able to buy our debt, then wouldn;t it stand to reason the our currency would go down in relative value and the things that we import would inflate in price?

 One also has to wonder what happens once we hit an equilibrium and debt has subsided enough, perhaps in a couple years, if we start to have a Kaboom effect of inflation that we cannot control over the items that are neccessary.  A hyperinflation of food, an oil products would even strenghten the price declines of debt financed items like houses.  If you are trying to simply pay for food, energy, gas and medical care, then the price you will be wiling to pay for a house will continue to go down. 

 

Paul 

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Re: Hyperinflation or continuing Deflation??
Amanda V wrote:

I also say that increasing oil prices are going to cause massive inflation.  And you have not accounted for that.  Every single commodity pretty much is dependent on oil right through its creation to transport. 

I also rekon interest rates will go up to combat this inflation.  What say you guys ???

The Crash Course and other sources explain that increasing prices MAY be a result of inflation, but rising prices do not cause inflation.  Monetary inflation is an increase in the supply of money relative to the amount of goods; your money is worth less. 

Oil prices may also rise due to less supply and higher demand, which appears very probable in the future.  So it seems inflation and higher oil prices could both cause things that depend on oil to become more expensive

At this time the Fed has signalled they will do everything possible to keep interest rates low and "stimulate" the economy.  An interest rate increase seems possible though if foreign countries stop loaning us as much money and decrease the amount of treasuries they buy, and the Fed can't or doesn't step in to buy them up. 

Tom

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Re: Hyperinflation or continuing Deflation??
woodman wrote:
Amanda V wrote:

I also say that increasing oil prices are going to cause massive inflation.  And you have not accounted for that.  Every single commodity pretty much is dependent on oil right through its creation to transport. 

I also rekon interest rates will go up to combat this inflation.  What say you guys ???

The Crash Course and other sources explain that increasing prices MAY be a result of inflation, but rising prices do not cause inflation.  Monetary inflation is an increase in the supply of money relative to the amount of goods; your money is worth less. 

Oil prices may also rise due to less supply and higher demand, which appears very probable in the future.  So it seems inflation and higher oil prices could both cause things that depend on oil to become more expensive

At this time the Fed has signalled they will do everything possible to keep interest rates low and "stimulate" the economy.  An interest rate increase seems possible though if foreign countries stop loaning us as much money and decrease the amount of treasuries they buy, and the Fed can't or doesn't step in to buy them up. 

Tom

Hmmmmm.  Not sure.  We may be chasing our tail here.  Cause and effect, effect and cause.

I don't agree that increasing prices do not cause inflation.  What measures (defines) inflation and what causes inflation are in around about way, the same thing.  The CC video gives an example of how inflation is measured by comparing the same groceries each year.  So if their price goes up, inflation goes up - right ? 

You say inflation is "increasing the money supply relative to the amount of goods", and "your money might be worth less"   but by definition, if your money is worth less - then the goods cost more of it - (inflation). 

So pumping a whole lot of money in to the economy causes inflation but so too does increasing prices from other economic factors - such as scarcity.

Oil will cause inflation.

Whether there is a NET inflation or deflation is another matter.  It may be correct that there will be deflationary forces.  But so too will there be inflationary forces, and it will be the net sum that determine the final figure. 

 

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Re: Hyperinflation or continuing Deflation??

It's all deflation folks in the near and mid-term.  Bond market couldn't be more clear about that.  And yes, when China shows less interest in Treasuries, interest rates will skyrocket.  That is even more deflationary...that will be the real collapse of the economy.  So we're in deflation for a while.  The increase in money supply from the Fed is massive historically, but nothing compared to the $52 trillion in outstanding credit (pushing up to $500 trillion if all derivates are counted).  The Treasury/Fed's actions are like trying to fill an emptying pool with a 2 gallon bucket...it can't be inflationary...yet.  Unfortunately that 2 gallon bucket is taking money from all of us and filling up only the rich bankers' pockets so they can ship it to their accounts in Switzerland.  :)

Friedman's monetarist theory which predicts inflationary reaction to Fed actions is out of date since money is no longer all sitting in checking and savings accounts.  And the old term "printing money" should probably no longer be used because we don't do it anymore.  The situation in Weimar was literally printing more paper notes.  We live in a world where buying power is created with auctioned credit, not paper currency. 

 

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Re: Hyperinflation or continuing Deflation??

"One also has to wonder what happens once we hit an equilibrium and debt
has subsided enough, perhaps in a couple years, if we start to have a
Kaboom effect of inflation that we cannot control over the items that
are neccessary.  A hyperinflation of food, an oil products would even
strenghten the price declines of debt financed items like houses.  If
you are trying to simply pay for food, energy, gas and medical care,
then the price you will be wiling to pay for a house will continue to
go down. "

I think the above is the definition of 'stagflation'. A stagnant economy with debt based asset prices continuing to decline while new money goes to increasing the price of (but not necessarily demand for) remaining attractive assets (i.e. all the ones not burdened or financed with debt such as food, commods, fuel).

Whether it is 'deflationary' or 'stag(in)flationary depends on the balance of power between the debt and non-debt asset classes.

Crucially, inflation is driven by wages. If wage inflate, then this inflates pretty much all asset classes. The fed can print money all it likes but unless this leads to rising wages for J6P then it won't be reflationary, and certainly won't be hyper inflationary.

Note that as a possible recovery point is reached, the fed can prevent hyperinflation (or even just significant inflation) of new credit simply by raising the bank reserve requirement, so that the new money sitting in bank reserves can't be loaned. This would also require a change in the rules such that the reserve requirements apply to all bank acitivties, not just checking deposits.

 

 

 

 

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pleaseremoveme
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Re: Hyperinflation or continuing Deflation??

I suppose all the points I wanted to make have been made. I believe the US monetary system is well protected against hyperinflation, because the government has to auction of securities, which means automatically rising interest prices when the government tries to borrow more. Hyperinflation is possible, but only if Obama were commited to detroying the dollar.

So what about the debts? As Chris said in `the crisis explained in one chart', there are only three possible ways to go:


Pay the debts down Default on them Inflate them away

If the last one can be made to work, there will only be stagflation. If not, there will be depression.

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