revisiting which comes first: hyperinflation or deflation

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strabes's picture
strabes
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revisiting which comes first: hyperinflation or deflation

I hate to bring this up again, but I'm getting a sick feeling today that I'm wrong that deflation will come first. 

I'm writing an article decribing how the last 30 years has been nothing but false growth via credit inflation thanks to the Wall St / DC system colluding together to extend it.  So if the system works and works and works to extend and extend and extend inflation, why would it not extend it to its ultimate end--hyperinflation? Isn't that what we saw in Weimar? 

I'm starting to think we got extended deflation in the US during the Great Depression because FDR refused to further extend the system and give Wall St whatever it wanted, by definition then an exponentially inflated system had to deflate.  But this time Bush/Obama/Fed quickly did exactly what Wall St wanted so exponential "growth" could continue. 

Hmmmm......sucks to be hostage to this system, facing impoverishment if we guess wrong.  Proves the lie of "freedom." 

Is Prechter completely wrong because he's too much of a nerdy scientist to be able to look at the humans running the show?

 

 

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Re: revisiting which comes first: hyperinflation or ...

I subscribe to the idea that de/inflation is determined by the money supply (and its speed). It seems that the Fed's paper never gets into the "real" economy but remains stuck in the "financial" economy generating more "wealth" for the players. So at the moment I think mild deflation is operating but galloping inflation is in our future.

Here in Canada on BNN (business news network) Interactive Brokers is running an ad for forex trading where the voiceover is that Central Banks are printing money and the visual shows the banks on huge mounds of money that keeps spewing out of their mouths. Now is the ad agency that produced that plugging gold or are they blithely unaware? Don't know if the same ad runs in the US.

 

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Re: revisiting which comes first: hyperinflation or ...

I believe that inflation is the amount of money, the speed or where it is parked to me is irrelevant.

I think we will wind up in a currency crisis which severely devalues our sore of value. Zimbabwe USA.

 

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Re: revisiting which comes first: hyperinflation or ...
strabes wrote:

I hate to bring this up again, but I'm getting a sick feeling today that I'm wrong that deflation will come first. 

I'm writing an article decribing how the last 30 years has been nothing but false growth via credit inflation thanks to the Wall St / DC system colluding together to extend it.  So if the system works and works and works to extend and extend and extend inflation, why would it not extend it to its ultimate end--hyperinflation? Isn't that what we saw in Weimar? 

I'm starting to think we got extended deflation in the US during the Great Depression because FDR refused to further extend the system and give Wall St whatever it wanted, by definition then an exponentially inflated system had to deflate.  But this time Bush/Obama/Fed quickly did exactly what Wall St wanted so exponential "growth" could continue. 

Hmmmm......sucks to be hostage to this system, facing impoverishment if we guess wrong.  Proves the lie of "freedom." 

Is Prechter completely wrong because he's too much of a nerdy scientist to be able to look at the humans running the show?

Strabes,

The credit bubble always comes first, and as you've already pointed out we're emerging from a 30-year bubble.  We then hit Peak Debt, which is when the SHTF and everything fell apart.  Yes, TPTB injected liquidity into the financial system, which could be regarded as inflationary by itself, but the thing is you cannot look at it by itself.  You have to also look at the decrease in credit which offsets the increase in liquidity. 

The banking system can have (and does) all sorts of reserves parked at the Federal Reserve, but people and businesses are still in Peak Debt mode and will not borrow.  In fact, they are paying down debt instead.  With money going to pay debt, it is not chasing goods and services, and is therefore very unlikely to cause inflation, nevermind hyperinflation, in the near term.  Paying down that debt is going to take a very long time, and it will be excacerbated by what is likely to be rounds of increased taxes at every level - State, Municipal, and Federal.  That will leave very little discretionary income in the US consumer's pocket, making any kind of recovery highly unlikely anytime soon.

I believe inflation and hyperinflation will come, but not until after we get into some serious debt-deflation, which we have only gotten a whiff of so far.  Severe, punishing, ruthless deflation will sow the seeds for public sentiment and political grandstanding to turn on the printing presses like we've never seen before, but so far, that ani't happening.  I believe it most likely will, but don't see it yet. 

my 2 cents.

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Re: revisiting which comes first: hyperinflation or ...

The fact that prices are not falling despite all the unemployment and deflationary events should tell you that inflation isn't very far away.

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Re: revisiting which comes first: hyperinflation or ...

Jump Strabes! Jump! Don't give in to the dark (hyperinflation) side Strabes!

No seriously, I think its important to realize that inflation and deflation are simply trades, not macro-economic gospel. Throw out the macro-economic theory that is clouding your perspective and the truth will slap you in the face. When the groupthink is convinced that hyperinflation is the gospel, prepare for the deflation trade. When the herd jumps on the deflation trade bandwagon, position yourself for the coming inflation trade. 

Whatever you do, refrain from identifying yourself as "this" or "that". Its the only way to get from point A to point B in this bipolar marketplace/society with some capital (and some self-identity) intact.

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Re: revisiting which comes first: hyperinflation or ...
leo0648 wrote:

The fact that prices are not falling despite all the unemployment and deflationary events should tell you that inflation isn't very far away.

I agree with 95% of what you said.  I would just change a few key words:

The fact that prices are not exploding despite all the money printing and liqudiity injections should tell you that deflation is here.

Wink

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Re: revisiting which comes first: hyperinflation or ...

Yeah FB I'm generally back in the deflation camp this morning. 

But I'm still unsure of the definition of hyperinflation.  I don't know if it requires recovery to kick-in.  I look at banks borrowing near zero from the Fed and loaning near 30% on credit cards now as basically turning their big vacuum machine up to a higher speed.  They're sucking wealth out of the system (from the class of borrower nobody cares about so there won't be much protest) while they still can.  They know the gig is eventually up.  Makes me think hyperinflation comes when the banks decide to switch the vacuum to its highest power setting and scramble to get 100%, 200%, 500% on their assets from everyone, no holds barred, before the system dies.  It's the final death squirm of the parasite.  But they would never do that until they thought the host was going to stop paying its 5-30%.  Jamie Dimon would never want to kill the goose as long as it's laying his $17 million egg.

Don't know.  Just speculating.

Separate topic: I think what you say about taxes is absolutely true as governments will be just like banks trying to suck liquidity from the system.  This is the reason I think everybody should pay the penalty now and get out of their IRA/401ks.  10% is nothing compared to what government may do in the future.

 

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Re: revisiting which comes first: hyperinflation or ...

JAG, I like the counter-groupthink model.  I usually operate that way in life.  Good to remember it's really no more than that in trading.

When it comes to the nature of society, bipolar is right.  It's been exhausting me lately which makes me consider another counter-groupthink option...crossing the border for good.

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Re: revisiting which comes first: hyperinflation or ...

Strabes,

Banks could be raising interest rates on credit cards because they are insatiable pigs at the trough, or because default rates have risen to record levels with no end in site.  I would say "both of the above".  Either way, increased debt payments are deflationary as less money is available to chase goods and services, more goes to pay debt, and less people will be willing to borrow at high rates. 

With governments being the only entities willing (and able) to take on additional debt, I am unsure why people worry about "who is going to lend us all this money".  Corporate debt and consumer debt continues to collapse.  It is being replaced by government debt.  I know it's all unpayable, but "where the money will come from" to buy the bonds that must be sold does not seem to be a mystery to me.  It's all out there and nobody else is borrowing it, so the governments will continue to vacuum it all up for the time being, which may be longer than anyone thinks.

When interest rates on US Treasuries start to move up (significantly), then I'll start to worry about us reaching an inflection point.  Right now, they're still stuck near zero and may even go lower before they go higher.

 

 

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Re: revisiting which comes first: hyperinflation or ...

Today, Bernanke outlined the first steps the Fed is going to take to keep inflation at bay.  In short, they are going to increaes the rate the Fed pays to the Banks for parking excess reserves at the Fed.  What that means, is that banks will be even less motivated to loan, and its less likely that much of the money the Fed has recently injected will make it to the masses.  The banks win here in a free trade....but its also a way to make the banks stronger (not making an opinion if this is right or wrong, just a statement that this will strengthen banks).  Where the money is parked is absolutely key to this discussion....to ignore it is to ignore the fundamental structure of our financial system today.

Further, credit is contracting rapidly.  M3 shows this clearly - and has been spiking down violently in the last couple months.  This is not normal, and has exponential implications similar to money expansion.  That is to say that in fractional banking the m3 either expands exponentially or contracts exponentially.

The speed of money is not improving.  This is definitely relevant to this topic.  If everyone sits on the dollars they have (if they have them), then the money can no longer grow in the system.  Revenues fall, businesses profits fall, and that leads to deflation.

So, we have less money (M1, M2) in the hands of the masses.  We have credit collapsing and velocity stagnent or slowing.  Therefore, there is less money.  There is still massive deflation in leveraged goods.  The fed can now sit on its loads of "assets" and unwind over decades.  This is very likely.  This also would lead to our best case scenario perhaps - a slow decline in standard of living (as defined by economists now - not how this community would define it).

IF, and only if, unemployment improves and the banks take money from the Fed can inflation trigger.  Last note - interest rates rise for several reasons - 1) nothing to do with inflation - but rather unemployment predictions/creditworthiness   2) inflation.  3) availability of dollars.  If interest rates go up, that is not an indication that inflation is here all by itself - rather it could be that there are far fewer dollars, and far worse credit.

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Re: revisiting which comes first: hyperinflation or ...

If they are printing the bulk of the deficit since they can't off the debt on foreigners - which IS the case today. Then I really don't think unemployment, velocity or where the stuff is parked is meaningful.

The bottom line: Bernake is counterfeiting what we can't get loans for. This makes our dollar a Zimbabwe dollar.

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Re: revisiting which comes first: hyperinflation or ...

Davos - but isnt it funny how most on the CM site would argue for a no debt issuance of money.  That, in effect, is what our government with the Fed is moving toward.  The day we cant find enough buyers of our debt is the day we will be forced to print money directly, backed by the same exact backing as backs our currency and debt now - but with no interest.  At that moment of potential crisis may come a massive awakening and policy shift where our debts can be paid as promised, and new money is printed without interest.  I love that we are printing our own money without foriegn help - its one step closer to printing money without foriegner and without interest payments....Brilliant! 

International markets will force us to be in control, just as personal finances ultimately are controlled by the marketplace if we become overextended.

Last, I think everyone should stop comparing the US in any way to Weimar or Zimbabwe - - They are as similar to the US as Mars is from Saturn.

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This Time Is Different

Strabes,

 I recommend this book for the answer that you are seeking in this thread:

This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff (Hardcover - Sept. 11, 2009)

John Mauldin recommends it as well:

While I was in Europe, and flying back, I had the great pleasure of reading This Time is Different, by Carmen M. Reinhart and Kenneth Rogoff, on my new Kindle, courtesy of Fred Fern.

I am going to be writing about and quoting from this book for several weeks. It is a very important work, as it gives us the first really comprehensive analysis of financial crises. I highlighted more pages than in any book in recent memory (easy to do on the Kindle, and even easier to find the highlights). Rather than offering up theories on how to deal with the current financial crisis, the authors show us what happened in over 250 historical crises in 66 countries. And they offer some very clear ideas on how this current crisis might play out. Sadly, the lesson is not a happy one. There are no good endings once you start down a deleveraging path. As I have been writing for several years, we now are faced with choosing from among several bad choices, some being worse than others. This Time is Different offers up some ideas as to which are the worst choices.

Van R. Hoisington  and Lacy H. Hunt, Ph.D. also discuss this book (emphasis mine)

The real question for financial participants is whether all these influences result in inflation or deflation, and the authors' research details both outcomes. As is widely feared here in the U.S., they outline that many countries have had the right circumstances and mechanisms to inflate away their debt overhang, and, in fact, have done so by debasing their currency. Those particular circumstances are not currently present in the United States.

According to Reinhart and Rogoff the norm is that major economic contractions lead to deflation. Importantly, they call our present economic circumstances the "second great contraction."

Thus, not only has the historical "qualitative" research on the subject of deflation chronicled the deflationary impulses emanating from overindebtedness (Fisher's 1933 "Debt-Deflation Theory of Great Depressions"), but also modern "quantitative" methods have now essentially confirmed this conclusion. Over-indebtedness and major contractions lead to deflation.

Debt Overwhelms Monetary Policy

It has been more than a year since the Federal Reserve began a massive expansion of Federal Reserve Bank credit, from $1 trillion to $2.2 trillion, flooding the banking system with reserves. This unprecedented action naturally raised inflationary fears since it was assumed that this was the beginning of a monetary creation process which would eventually lead to job and income growth, excessive expenditures, and finally massive price increases.

If the economy were not in the throes of writing down bad debts that were caused by a massive decline in asset prices, it is possible that the money supply (M2) in response to this increase in reserves could have expanded by $4 trillion, or 96%. According to the late Nobel prize winning economist Milton Friedman, an increase in M2 of that magnitude would have been highly inflationary. However, M2 did not explode. Instead, in the past twelve months this aggregate has risen only 3%. This is less than 1/2 of the average growth rate over the past fifty years (Chart 2).

If, as Friedman assumed, the velocity of money is stable (MV=GDP) then nominal GDP expansion in the ensuing quarters can be expected to grow about 3%. If prices rise about 1.5%, then real GDP growth would also rise about 1.5%, which is far below the level of growth needed to employ new labor force entrants and existing unemployed or to more fully utilize our present unused capacity in our factories. In the last six months the growth rate of M2 has slowed to near zero. If this pattern continues, it would be rational to expect GDP to grind to zero with no change in the price level.

The very first step toward an inflationary cycle has to be to get the monetary aggregates expanding vigorously. That cannot be accomplished with the Fed "printing money", i.e., adding more reserves into banks that cannot or will not make loans. The reason this process has not begun (and will not for a time) is the overhang of excessive indebtedness and asset price depreciations. No one needs to borrow, or has the resources or balance sheet to borrow, and banks are busily writing off bad debt. Irving Fisher warned of that process (note our Third Quarter 2009 quarterly letter).

Over-indebtedness Creates Excess Supply

Despite the concurrent developments of little money growth and declining loan growth (Chart 3), the fear nevertheless remains that an inflation surprise might be just around the corner. The reason to discount this notion is that excessive debt has contributed greatly to a flat, or perfectly elastic aggregate supply curve. A country's inflation is determined by the interaction of aggregate supply and demand. Friedman wrote that a large increase in money in the hands of the non-bank public would be inflationary because he assumed a normal upward sloping aggregate supply curve (Chart 4). In this case the aggregate demand for goods (depicted as the demand curve Line A) would shift outward to Line A1, and thus prices would naturally rise. You will note what happens to prices if a demand curve B is intersecting the supply curve in the so-called Keynesian range where it is flat. If aggregate demand increases to B1, prices do not change.

Whether the supply curve is in a flat, normal, or upward sloping position depends on the extent of excess resources in the economy. Today it is obvious that the U.S. economy has plentiful excess resources, so any increase in demand will result in little price change. This will be the case until our unemployment rate of over 17% (the U6 measure) drops by a considerable amount and we begin to use our factories well above our current 68% utilization rate.

Thus, our current economic circumstances guarantee there will be no surprise inflation. Employing those who are out of work and fully utilizing our resources will be a slow process. More importantly, it will take time to get the monetary engine reignited. Banks will have to begin lending and people and companies will have to determine that prospects are good enough to take the risk for expansion and investment. It will take years for these processes to get started because of our over-indebtedness and falling asset prices.

The consequences of excessive debt are already painful at the household level. The civilian employment to population ratio, a highly important barometer of the average household's standard of living, fell to 58.2% in December, the lowest reading in 26 years and down from a peak of 64.7% in April of 2000 (Chart 5). Thus, the standard of living has worsened as the debt to GDP ratio has marched steadily higher. With debt to GDP still rising, a further deterioration of the standard of living is inescapable.

Debt and Fiscal Policy

Deficit spending only provides a transitory boost to the economy. It initially raises GDP, as it did in the second half of 2009, but then the effect dissipates and later is reversed, as financial resources available to the private sector are reduced. In a separate research study Rogoff and Reinhart write, "At the height of Japan's banking crisis in the 1990s, repaving the streets in Tokyo became a routine exercise. As a result, Japan's gross (government) debt-to-GDP ratio is now nearly 200% and a drag on what once was a vibrant economy." Our present high deficit situation suggests that taxes will rise (including those of state and local governments), depressing economic activity further. In addition to the expiration of the 2001 and 2003 tax cuts, the Obama administration is proposing substantial taxes on financial institutions to pay for the cost of the financial bailout. Since the tax multiplier is high, this will reinforce the drag on economic activity from the lagged effects of deficit spending.

Treasury Bonds

Since 1990 Treasury bond yields have steadily moved downward in line with a more benign inflationary environment (Chart 6). Those yearly declines in yields continued last year with an average interest rate of 4.07% versus 4.28% in 2008. Obvious sharp reversals have occurred in their downward trend due to shifts in psychology reacting to generally transitory factors, as we saw in 2009. To remain fully invested in long Treasuries in this high volatility environment requires a simple discipline based on the academic literature which demonstrates that over time bond yields move in the same direction as inflation (Fisher equation).

Presently, we view the inflationary environment as benign because: 1) the U.S. economic system is overleveraged and academic research confirms that this circumstance leads to deflation; 2) monetary policy is, and will continue to be, ineffectual as efforts to spur growth are thwarted by declining asset prices, loan destruction, and adverse regulatory influences; 3) the federal government's spending spree will necessarily cause taxes and borrowings to rise, further stunting any economic growth. These factors ensure that inflation will be quiescent. Interest rates easily can and do rise for short periods, but remaining elevated in a disinflationary environment is contrary to the historical experience. We are owners and buyers of long U.S. Treasury debt.

Van R. Hoisington 
Lacy H. Hunt, Ph.D.

 

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Re: revisiting which comes first: hyperinflation or ...
rickets wrote:

Davos - but isnt it funny how most on the CM site would argue for a no debt issuance of money.  That, in effect, is what our government with the Fed is moving toward.  The day we cant find enough buyers of our debt is the day we will be forced to print money directly, backed by the same exact backing as backs our currency and debt now - but with no interest.  At that moment of potential crisis may come a massive awakening and policy shift where our debts can be paid as promised, and new money is printed without interest.  I love that we are printing our own money without foriegn help - its one step closer to printing money without foriegner and without interest payments....Brilliant! 

International markets will force us to be in control, just as personal finances ultimately are controlled by the marketplace if we become overextended.

Last, I think everyone should stop comparing the US in any way to Weimar or Zimbabwe - - They are as similar to the US as Mars is from Saturn.

Interesting perspective, not sure I agree with it because I have the following interpretations of the situation:

  1. The FR is not moving and wouldn't move to a non debt backed currency.
  2. Lobbyist would do God knows what to any politician who advocated what Jackson did.
  3. Our interest rates "could" go up. "If" that happens the short term debt that rolls over (which is now pushing a trillion) will have interest payments that will also have to be monetized.
  4. Bernake is already using QE to pay what isn't being purchased by foreigners. He has eased well over a trillion so far. If no for that we would have defaulted. They are hiding a lot of this under "Other Households" which CM and Sprott and ZH have all bought to light.
  5. We are or soon will be Zimbabwe USA. What rational reason could prevent that? Just because we were the biggest empire doesn't mean we can't fall. More empires fail because of funny money and spending then invasion.
  6. It's all about exponential unsustainable DEBT.

Best

 

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Re: This Time Is Different

Thanks Jeff

I will add that to my huge reading list.

I have a question for you and the others who know more about this than I certainly do.

I understand that inflation and deflation relate to the amount of money in circulation. In terms of prices

How do you see prices changing in the near term. It seems like food and other

commodities will get more and more expensive while oil kind of 

stagnates. Some other things in the market place are either going sideways or rising slowly.

V

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Re: revisiting which comes first: hyperinflation or ...

I'm not sure that "deflation" and "inflation" alone are adequate terms to describe where we are heading.  It may be that stagflation (the economy isn't growing but prices are, which is not a good situation) better describes where we are and where we may be at least in the short term.

Deflation and inflation may over simplify conditions on the ground to the point of being relatively useless.  For example, if there are shortages, prices may go up but that doesn't mean we are in an inflationary period.  We are seeing this clearly today as the east coast is under snow.  Locally, prices on many things have started up because of shortages that hit very quickly.  It is a sober reminder of how fragile our distribution system is.

Our currency is being debauched as we are drowning in debt that cannot be repaid.  I don't think that our coming default and subsequent currency devaluation can be adequately described as inflation.

Larry

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Re: revisiting which comes first: hyperinflation or ...

Hey Davos

Can you post that one audio of (can't remember the guys name) where he suspected that we were having deflation but it was being offset by the printing presses. He likened it to a tug of war. I think it would be a good contribution to this discussion.

Inflation, deflation? I think its like a motorcycle ramp. First your going to feel a little dip them Zooooom! Off into the stratosphere.

 

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The Dollar Is As Valuable Today As It Was 35 Years Ago
Davos wrote:

The bottom line: Bernake is counterfeiting what we can't get loans for. This makes our dollar a Zimbabwe dollar.

Weak Dollar Illusory as Correlated Trade Shows Gains

Feb. 8 (Bloomberg) -- For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.

Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes. That was four years after the Bretton Woods agreement, set up in 1944 to link currencies to the price of gold, collapsed. The U.K. pound has dropped 34 percent and the Canadian dollar has fallen 6 percent.

From Black Swan Capital: Where Are We? Our Best Guess. (h/t Farmer Brown)

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

                             George Soros

FX Trading – Where are we? Our best guess! 
Long-time readers know we are big fans of the boom-bust theory of price action, as first I saw articulated by George Soros back in 1987 in his book, Alchemy of Finance. (It is by the way the same time I learned of Karl Popper and the black swan; and name our firm accordingly, back in 2003.)

We use the boom-bust construct to help us understand better, but never with anything approaching perfect knowledge (if one can ever approach such a thing), where we might be in the current cycle regarding the dollar.

A visual of the boom-bust looks like this:

A written summary, defining the stages:

1. The unrecognized trend; the beginning of a self-reinforcing process
2. The successful test
3. The growing conviction, resulting in a widening divergence between reality and expectations
4. The flaw in perceptions
5. The climax
6. A self-reinforcing process in the opposite direction

As you can see, this boom-bust cycle in a way mirrors the Elliott Wave cycle. Both are grounded solidly in human action, or the way human’s drive price action based on waves of sentiment (fear and greed), I think.

With anything in the financial world, one only never really knows until the gift of hindsight is revealed. Unfortunately we often listen to people who think they know— that is usually a big mistake. Everyone, and their mother, in this dollar cycle, seems to think they know exactly where the dollar is going. Of course as you well know by now, the buck is heading to zero!

We have seen it differently for a while. But only the gift of hindsight will determine if our guess (forecasts are simply guesses wrapped in a better package) is correct.

That said, we think we have witnessed the successful test phase of the boom-bust cycle and are at the very early stages of the growing conviction stage (in the Elliott Wave world that is often referred to as Wave three, usually the longest wave of the trend).

Dollar Index Weekly:

During the beginning of the Growing Conviction Stage you start to see signs of what John Percival (editor of Currency Bulletin) calls “conversion flow.” We are starting to see it in the form of positioning numbers and commentators coming around to the idea the dollar is “really” rising and finding some rationales to dispute the still lopsided, but cautious, dollar bearishness.

Today we saw a perfect example of that type of thing in the Bloomberg story listed first above. “The dollar is a valuable now as it was 35 years ago.” Cough, guffaw, hack…say what…you might be saying to yourself, if you are one who actually listened to the dollar doom and gloom crowd that do their best to scare the be-jesses out of you. Often these seers that always seem to have a handle on absolute truth are not currency analysts, but love to use the dollar to hawk much of their other wares. (That was a bonus just in case you hadn’t noticed.)

How can it be? Well, it just is. Conversion flow is sentiment changing. It can swing on a dime. Conversion from bear to bull is what creates the buying that powers the Growing Conviction Stage.

So our guess is we are early into stage 3, or wave 3, of this dollar multi-year bull market.

The key word in that sentence was “guess.” In about two- or three-months Mr. Hindsight will likely share the truth.


I'm not trying to single you out Davos, but your the only "inflationist" in this conversation.

(edit:sp)

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Re: revisiting which comes first: hyperinflation or ...

JAG

I read your post but I still don't understand your position.

Davos. I'm in the inflation camp too. Laughing

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Re: revisiting which comes first: hyperinflation or ...

The reason I posted this last night was because I was just about to execute the biggest piece of my wealth preservation plan to ride out the storm.  So it's not a trade that I can easily reverse, but a commitment to a strategy of being as removed from both banks and governments as possible.  So I panicked since I have no crystal ball...I hear sheep..."panic! panic!"  :)   I'm back to normal now, or abnormal, all the same.

Jeff, thanks for the article.  I agree with Dr. Hunt that long-term rates won't be skyrocketing anytime soon, but establishing a position in them?  That means she thinks there's a lot of room for rates to still drop enough to generate a substantial cap gain.  Doesn't bode well for people who hope to keep their jobs, or those who hope to make cap gain in anything but cash notes, or those who keep their assets in banks.  Reinforces the view that the US will throttle back while Asia resets and then throttles up over the next 30 years to bring us closer to global equilibrium

FB, I don't see a difference in vacuuming, as you say "insatiable pigs," and increase in defaults.  The former drives the latter.  Through 07/08 as we saw credit spreads widening, it was basically big capital holders vacuuming from the outer edge of the economy toward the inner core.  That bond market shift drove microeconomic shifts at the bank/business/individual level, and the result is inevitable defaults...less liquidity on the outskirts. 

Speaking of the inner core, in the current global economy it happens to be the US Treasury debt Dr Hunt is investing in, which is why her view is a bad sign...big long-term capital will be hiding as close to the core of our system as possible instead of outside seeking returns, providing employment.  But I'm not willing to invest in the core since that makes me hostage to 1 govt, a scary one at that, and 1 paper currency.

 

 

rickets's picture
rickets
Status: Silver Member (Offline)
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Posts: 238
Brazil or Gold

If the US dollar implodes, and hyperinflation or massive deflation hit, what about other options other than Gold?   How about Brazilian assets?  That country has ducked many of the recent financial issues, creates its own food and energy (self sufficient), and has a growingly stable government.

Anyway....why gold if you can pick up a different currency that is actually currently used?  What about stocks or real estate in a country not exposed as much to this crisis, and has a few more years or decades of energy than most countries (like a Brazil)?  Not a recommendation, just food for thought.  If Europe and the US decline as many here predict, is gold going to be better than investing in a country like Brazil?  If you think that, I would appreciate any thought on why?  Brazil will be able to weather peak oil better than almost all other countries, has the most lithium on the planet, has huge food making capabilities....so, if peak oil is true, and food will be an issue, then Brazil should be the next superpower no? 

I would love any comments as to why gold instead of Brazilian Reals or equities?  Also if anyone has any color on brazil I would love it as my knowledge is light and purely based on reading 50 pages of research (lame and biased I am sure!).

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Davos
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Posts: 3620
Re: The Dollar Is As Valuable Today As It Was 35 Years Ago
JAG wrote:
Davos wrote:

The bottom line: Bernake is counterfeiting what we can't get loans for. This makes our dollar a Zimbabwe dollar.

Weak Dollar Illusory as Correlated Trade Shows Gains

Feb. 8 (Bloomberg) -- For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.

Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes. That was four years after the Bretton Woods agreement, set up in 1944 to link currencies to the price of gold, collapsed. The U.K. pound has dropped 34 percent and the Canadian dollar has fallen 6 percent.

From Black Swan Capital: Where Are We? Our Best Guess. (h/t Farmer Brown)

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

                             George Soros

FX Trading – Where are we? Our best guess! 
Long-time readers know we are big fans of the boom-bust theory of price action, as first I saw articulated by George Soros back in 1987 in his book, Alchemy of Finance. (It is by the way the same time I learned of Karl Popper and the black swan; and name our firm accordingly, back in 2003.)

We use the boom-bust construct to help us understand better, but never with anything approaching perfect knowledge (if one can ever approach such a thing), where we might be in the current cycle regarding the dollar.

A visual of the boom-bust looks like this:

A written summary, defining the stages:

1. The unrecognized trend; the beginning of a self-reinforcing process
2. The successful test
3. The growing conviction, resulting in a widening divergence between reality and expectations
4. The flaw in perceptions
5. The climax
6. A self-reinforcing process in the opposite direction

As you can see, this boom-bust cycle in a way mirrors the Elliott Wave cycle. Both are grounded solidly in human action, or the way human’s drive price action based on waves of sentiment (fear and greed), I think.

With anything in the financial world, one only never really knows until the gift of hindsight is revealed. Unfortunately we often listen to people who think they know— that is usually a big mistake. Everyone, and their mother, in this dollar cycle, seems to think they know exactly where the dollar is going. Of course as you well know by now, the buck is heading to zero!

We have seen it differently for a while. But only the gift of hindsight will determine if our guess (forecasts are simply guesses wrapped in a better package) is correct.

That said, we think we have witnessed the successful test phase of the boom-bust cycle and are at the very early stages of the growing conviction stage (in the Elliott Wave world that is often referred to as Wave three, usually the longest wave of the trend).

Dollar Index Weekly:

During the beginning of the Growing Conviction Stage you start to see signs of what John Percival (editor of Currency Bulletin) calls “conversion flow.” We are starting to see it in the form of positioning numbers and commentators coming around to the idea the dollar is “really” rising and finding some rationales to dispute the still lopsided, but cautious, dollar bearishness.

Today we saw a perfect example of that type of thing in the Bloomberg story listed first above. “The dollar is a valuable now as it was 35 years ago.” Cough, guffaw, hack…say what…you might be saying to yourself, if you are one who actually listened to the dollar doom and gloom crowd that do their best to scare the be-jesses out of you. Often these seers that always seem to have a handle on absolute truth are not currency analysts, but love to use the dollar to hawk much of their other wares. (That was a bonus just in case you hadn’t noticed.)

How can it be? Well, it just is. Conversion flow is sentiment changing. It can swing on a dime. Conversion from bear to bull is what creates the buying that powers the Growing Conviction Stage.

So our guess is we are early into stage 3, or wave 3, of this dollar multi-year bull market.

The key word in that sentence was “guess.” In about two- or three-months Mr. Hindsight will likely share the truth.


I'm not trying to single you out Davos, but your the only "inflationist" in this conversation.

(edit:sp)

Single me out all you want. I wasn't very popular when I called the real estate bubble back in the early 2000's or a depression. I could be wrong. I'm sticking to my beliefs. Looking backwards on the chart the dollar make the Bloomberg piece look off.

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
Re: revisiting which comes first: hyperinflation or ...

I would love any comments as to why gold instead of Brazilian Reals or equities?  Also if anyone has any color on brazil I would love it as my knowledge is light and purely based on reading 50 pages of research (lame and biased I am sure!).

I think maybe I see the coming problems in a broader spectrum that others may. I don't see the coming crisis as just a monetary one. I think it will be an everything crisis: oil, food, war, power struggles, and the like. In that environment I see it very much as a dog eat dog proposition. I know many peple have invested in mining but what happens when an area that isn't that stable to begin with (I'm thinking Africa) suddenly hold an extremely rare and sought after commodity like gold silver or copper? Don't you think that will create regime change? And violent ones at that. How can you depend on your stock being honored or even acknowledged?

I think this holds true for other commodities and stocks that you can't physically control. I don't know much about Brazil but I can't see it being immune from social unrest and over throw. This type of thinking always brings me back to the safety of hold physical PM's.

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
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Posts: 1443
Re: revisiting which comes first: hyperinflation or ...

Feb. 8 (Bloomberg) -- For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.

Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes.

I think this says it all to me. Measured against other currencies. So what? So one IOU is doing better against the other IOU? The assumption here is that they are real wealth but they aren't. The proof. Measure them all against gold.

Stan Robertson's picture
Stan Robertson
Status: Platinum Member (Offline)
Joined: Oct 7 2008
Posts: 662
Re: revisiting which comes first: hyperinflation or ...
Johnny Oxygen wrote:

Feb. 8 (Bloomberg) -- For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.

Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes.

I think this says it all to me. Measured against other currencies. So what? So one IOU is doing better against the other IOU? The assumption here is that they are real wealth but they aren't. The proof. Measure them all against gold.

Better yet, measure them against anything that isn't evolving much in quality; a loaf of bread, gallon of milk, auto tires or mufflers, box of crayons, etc. It doesn't make much sense to accumulate and store currency for the long term. Better to store your weath in things with intrinsic value.

Stan Robertson's picture
Stan Robertson
Status: Platinum Member (Offline)
Joined: Oct 7 2008
Posts: 662
Re: revisiting which comes first: hyperinflation or ...
Johnny Oxygen wrote:

Feb. 8 (Bloomberg) -- For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.

Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes.

I think this says it all to me. Measured against other currencies. So what? So one IOU is doing better against the other IOU? The assumption here is that they are real wealth but they aren't. The proof. Measure them all against gold.

Better yet, measure them against anything that isn't evolving much in quality; a loaf of bread, gallon of milk, auto tires or mufflers, box of crayons, etc. It doesn't make much sense to accumulate and store currency for the long term. Better to store your weath in things with intrinsic value.

Stan Robertson's picture
Stan Robertson
Status: Platinum Member (Offline)
Joined: Oct 7 2008
Posts: 662
Re: revisiting which comes first: hyperinflation or ...
Johnny Oxygen wrote:

Feb. 8 (Bloomberg) -- For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.

Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes.

I think this says it all to me. Measured against other currencies. So what? So one IOU is doing better against the other IOU? The assumption here is that they are real wealth but they aren't. The proof. Measure them all against gold.

Better yet, measure them against anything that isn't evolving much in quality; a loaf of bread, gallon of milk, auto tires or mufflers, box of crayons, etc. It doesn't make much sense to accumulate and store currency for the long term. Better to store your weath in things with intrinsic value.

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Re: revisiting which comes first: hyperinflation or ...

I'm in the high inflation camp too, but not quite hyperinflation in my view just yet. I just don't see the deflation in everyday prices. Other than home prices, and the stock market to an extent, what exactly has dropped in price that is noticeable to the everyday consumer? I don't see it. Now, might we have some more small-time deflation in the immediate short term? Sure, I can go with that. But I just don't see the Mish/Prechter viewpoint of a deflationary depression. I do have an open mind and listen when they speak up.  Bernanke is destroying the currency. As Jim Rogers said, Ben Bernanke will print money until there are no trees left. Larry might have the best viewpoint in the debate- stagflation. Ultimately, we're on the exponential curve of everything, so to me, inflation is the "winner". Yell

investorzzo's picture
investorzzo
Status: Diamond Member (Offline)
Joined: Nov 7 2008
Posts: 1182
Re: revisiting which comes first: hyperinflation or ...

Until we move one way or the other, it's Stagflation for me. Jon

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Farmer Brown
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Joined: Nov 23 2008
Posts: 1503
Who Will Fund Government Borrowing: This is who.

 

I've harped on this before.  As has been pointed out by Albert Edwards, corporate and personal borrowing are decreasing (read: collapsing) at rates high enough to fund the ever-increasing government deficits.  I know this cannot last forever, but for now, it puts a huge dent into the hyperinflationists arguments.  As long as there is capital just sitting there, it will go into US Treasury bonds simply because there is no other place for it to go.  In a related story, here we see there are $1.2 trillion just sitting in corporate coffers of SP 500 companies.  Gee, you think they're going to put that in Greek bonds? Chinese ETFs?  PMs?  Ha!  I doubt Mr. S&P500 VP of Finance is going to risk his career or attempt to explain to his board any investment of otherwise cap-ex funds into anything other than US Treasuries. 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aE6W8c9z9Bms&pos=6

 

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