What the Deflationist Campers Forgot to Put In Their Backpacks

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What the Deflationist Campers Forgot to Put In Their Backpacks

Here is the article I did in response to Bob Prechter's interview this weekend on FSN. I'm NOT knocking Prechter, I think the entire Elliot Wave thing is fascinating. I'm NOT knocking the Deflationist. I wrote this to point out that it is a jungle out there and even the best of both camps miss things that can bight us.

In this interview what stuck out was the misnomer that currencies can't be devalued. That is utter and absolute $&!!#@&%.

WHAT THE DEFLATIONIST CAMPERS FORGOT TO PUT IN THEIR BACKPACKS

The trick to camping is preparation. Nothing is worse than getting to the campsite and realizing that you forgot to put something in your backpack. Line to hang the food at night, an electric fence, pepper spray or a gun to keep safe from bears. A seasoned camper can usually substitute matches for a magnifying glass, or boiling water from a stream for drinking can take care of the forgotten water filter/pump. 

Leaves can, to some extent replace the roll of forgotten - well you know.

Personally I prefer preparation to Preparation H. 

What I think the Deflation Campers neglected to put in their backpack is ....

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Re: What The Deflationist Campers Forgot to Pack...

Davos,

In the event of a overnight devaluation such as you describe, are you assuming that gold and silver will somehow be immune to this dramatic devaluation in purchasing power? If you want to prepare for hypothetical possibilities, you might consider that if the IMF/Fed undertook the nearly impossible task of replacing the world's reserve currency, it might also take the relatively simple step of outlawing gold trade, or heavily taxing gold transactions.

The Mexico devaluation that you cited seems to be a bit of a stretch to me. Most of the world's currencies are actually a derivative of the USD. I'm not sure its logical to extrapolate the circumstances of a third-world derivative currency and apply them to the primary global currency. Of course anything is possible, but its not realistic to prudently prepare for all possibilities. 

I know CM, yourself, and the majority of this community are confident that gold will protect purchasing power in a wide variety of possible futures. I'm not willing to put the majority of eggs in that basket. Human nature being what it is, the closest thing to a sure-thing is to bet against the illusion of a sure-thing. 

I enjoyed your piece, and as a fellow hiker, I know that long walks in nature are very conducive to the cognitive process. However, that gold-filled "inflationist" back pack of yours must be getting awfully heavy. Luckily mine is packed with $100 bills of thin-air cash. Laughing

Meet you at the summit my friend.....Jeff

 

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Re: What The Deflationist Campers Forgot to Pack...

Hello JAG:

JAG wrote:

Davos,

In the event of a overnight devaluation such as you describe, are you assuming that gold and silver will somehow be immune to this dramatic devaluation in purchasing power? If you want to prepare for hypothetical possibilities, you might consider that if the IMF/Fed undertook the nearly impossible task of replacing the world's reserve currency, it might also take the relatively simple step of outlawing gold trade, or heavily taxing gold transactions.

I agree and think that they could easily outlaw gold and or take it all so they have it all to back. Jewelry and numismatic gold I doubt they'd take.

JAG wrote:

The Mexico devaluation that you cited seems to be a bit of a stretch to me. Most of the world's currencies are actually a derivative of the USD. I'm not sure its logical to extrapolate the circumstances of a third-world derivative currency and apply them to the primary global currency. Of course anything is possible, but its not realistic to prudently prepare for all possibilities. 

Many people were invested in high paying interest bearing bank CD's south of the border in Mexico. Many people in the US, a good majority from Texas and California lost life savings when this occurred. Any country, third-world/emerging or other can do this to shed debt. Argentina did this as well. Many countries have and likely will do this. I respect your view on this but my view is that this is very possible.

My point with Mexico was more to point out that the statement Bob made wasn't factual. A country can and many have devalued currencies backed by nothing.

JAG wrote:

I know CM, yourself, and the majority of this community are confident that gold will protect purchasing power in a wide variety of possible futures. I'm not willing to put the majority of eggs in that basket. Human nature being what it is, the closest thing to a sure-thing is to bet against the illusion of a sure-thing. 

Well, in this case (Mexico) a person holding his/her wealth in bullion could have exchanged it for any currency of his/her choice. A person holding 1,000 Old and now obsolete Pesos had one option - trade it in for 1 New Peso.

JAG wrote:

I enjoyed your piece, and as a fellow hiker, I know that long walks in nature are very conducive to the cognitive process. However, that gold-filled "inflationist" back pack of yours must be getting awfully heavy. Luckily mine is packed with $100 bills of thin-air cash. Laughing

Meet you at the summit my friend.....Jeff

Well, you might be able to use them for TP after you walk over my exhausted and dead body. LOL, take care my friend.

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Re: WHAT THE DEFLATIONIST CAMPERS FORGOT TO PUT IN THEIR ...

Interesting read. The points you listed for the Deflationistas simply asserted it for me while the other points didn't take strong enough hold. We are seeing some tensions at the G20 where US wants to keep spending and some of the others are finally growing up to realize it can't go on forever. I guess it's a bit different for me up here in Canada. If you guys devalue we'll probably follow. It's hard to say since we've been working hard at diversifying our exports.

Throw in Peak Oil and it changes the dynamics. I don't often see that being analysed in the (in/de)flation debates. Energy is and always will be the primary economic driver. We will keep hitting a hard and ever lowering energy ceiling anytime there is a chance at recovery. I don't think the public will continue being happy with evermore stimulus and bailouts and might just have to accept that we're in for some challenges. I have a strong feeling that we're soon approaching a tipping point in awareness about energy issues and the fact the "sustainable growth" is an oxymoron. I feel like a lot of people are seeing what is happening in europe and hopefully learning from them perhaps even after they've suffered their own recent losses. With each crisis more and more people start paying attention. The Gulf is no different.

 

I don't have much but in my backpack but so far I like a mix of about 30% CAD because this is where I live, 10% USD, 50% Canadian Maples (Au) and 10% Canadian Maples (Ag).  I consider my PMs long term savings and don't worry about it one bit. I don't gamble in the market (besides my pension which I cannot control and don't have much hope for). Can't afford to.

I prefer to pack light and put everything else into edible/medicinal perrenials, infrastructure, tools and skills. None of which I will ever worry about devaluation by TPTB Money mouth. But I guess I'm not camping anymore but setting up base camp.

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Re: What the Deflationist Campers Forgot to Put In Their ...

Davos, nice article. 

I agree whole heartedly with your point and actually try to live in this consumer and convinience society with a back-packers mentality & efficiency  - carry/use only what you absolutely need and improve the rest.

I've been following the discussions here on the site since the past year and a half and my feeling is the following:

- prepare ourselves on the worst-case scenario : asset value deflation (wages as well), inflation in commodity prices (due to peak oil)

- there will be new, unforeseen rules invoked by the powers that be; either IMF SDR's as the new "reserve" currency or a new currency in  oil/energy units; new income tax regulations/ or tax regulations stripped, etc.

- And ask the following question:  who controls commodity prices?  Gold and Silver (ETFs and bullion prices) are determined by the London/NY spot prices. My hope for the future is that the major markets lose their grip and smaller off-line, local markets spring up.  And that prices are determined by their actual scarcity/abundance.

Happy trails!

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Re: What The Deflationist Campers Forgot to Pack...
Davos wrote:
JAG wrote:

The Mexico devaluation that you cited seems to be a bit of a stretch to me. Most of the world's currencies are actually a derivative of the USD. I'm not sure its logical to extrapolate the circumstances of a third-world derivative currency and apply them to the primary global currency. Of course anything is possible, but its not realistic to prudently prepare for all possibilities. 

Many people were invested in high paying interest bearing bank CD's south of the border in Mexico. Many people in the US, a good majority from Texas and California lost life savings when this occurred. Any country, third-world/emerging or other can do this to shed debt. Argentina did this as well. Many countries have and likely will do this. I respect your view on this but my view is that this is very possible.

My point with Mexico was more to point out that the statement Bob made wasn't factual. A country can and many have devalued currencies backed by nothing.

Davos,

Maybe Prechter's statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it?  The size of the USD market is incomparable to a third world pegged currency.  I doubt anyone really knows what would happen if such a thing occurred and for that reason alone, I can't see it happening any time soon.  I think Prechter's point is that in a western democracy, leaders might not be able to do as they please because they can become slaves to the political reality.  Maybe the teaparty movement will show if this is really the case.

Another factor that might make a difference is money creation.  Because all money is loaned into existence, hyperinflation ( if caused by an outright increase in the money supply ) seems highly unlikely unless the FED/Treasury do massive QE to make up for the credit deflation.  The world is saturated in debt right now and there just are no more good borrowers left.  Governments will continue to try and make up the difference but what happens when a debt auction fails?  Do you think they will quietly try and monetize it or do you think they will try and raise rates?

I really don't know.  I still think this has to end in inflation but I am no longer convinced that we could not go through some severe deflation before we get there.

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Re: What The Deflationist Campers Forgot to Pack...
goes211 wrote:

<snip>

Another factor that might make a difference is money creation.  Because all money is loaned into existence, hyperinflation ( if caused by an outright increase in the money supply ) seems highly unlikely unless the FED/Treasury do massive QE to make up for the credit deflation. 

<snip>

Just because all money is currently loaned into existence does not mean that it must always be this way. A wild card in the mix is that the US gov could certainly start printing money directly instead of printing bonds. It may be that a desperate gov will try somethng like this instead of going into the deflationary spiral that some believe is inevitable.

 Ken

 

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Re: What the Deflationist Campers Forgot to Put In Their ...

In the case of Mexico or a potential devaluation int he US, what happens to prices of goods and what happens to debt?   I read up a little on the Mexican peso crisis but am confused still how it's in the interest of a government to do this or that the US could do it effectively.  

tom 

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Re: What The Deflationist Campers Forgot to Pack...
goes211 wrote:
Davos wrote:
JAG wrote:

The Mexico devaluation that you cited seems to be a bit of a stretch to me. Most of the world's currencies are actually a derivative of the USD. I'm not sure its logical to extrapolate the circumstances of a third-world derivative currency and apply them to the primary global currency. Of course anything is possible, but its not realistic to prudently prepare for all possibilities. 

Many people were invested in high paying interest bearing bank CD's south of the border in Mexico. Many people in the US, a good majority from Texas and California lost life savings when this occurred. Any country, third-world/emerging or other can do this to shed debt. Argentina did this as well. Many countries have and likely will do this. I respect your view on this but my view is that this is very possible.

My point with Mexico was more to point out that the statement Bob made wasn't factual. A country can and many have devalued currencies backed by nothing.

Davos,

Maybe Prechter's statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it?  The size of the USD market is incomparable to a third world pegged currency.  I doubt anyone really knows what would happen if such a thing occurred and for that reason alone, I can't see it happening any time soon.  I think Prechter's point is that in a western democracy, leaders might not be able to do as they please because they can become slaves to the political reality.  Maybe the teaparty movement will show if this is really the case.

They could easily say tomorrow, by announcement from Obama and Geithner that our dollar is now known as the "Old US Dollar" and they could hold up one "New US Dollar" and say, "Effective today these old dollars are no longer accepted by any bank, bring us 1,000 old dollars and we will give you 1,000 new dollars.

128 trillion of debt and unfunded liabilities would get wiped out leaving 128 billion of debt and unfunded liabilities. 

If someone had a mortgage of $1,000 a month it would be serviced with $1 new dollar, so a $100,000 dollar mortgage would be paid off in 100 months or with 100 bucks.

Really, it would just be a back-room deal with our external creditors to what we could get away with (how many old bucks to buy the new buck.) Other countries would have to do the same.

All transactions globally (about 80% of all transactions globally are done with the USD) would be pegged to the new dollar - or the world would drop the USD as the reserve currency.

goes211 wrote:

Another factor that might make a difference is money creation.  Because all money is loaned into existence, hyperinflation ( if caused by an outright increase in the money supply ) seems highly unlikely unless the FED/Treasury do massive QE to make up for the credit deflation.  The world is saturated in debt right now and there just are no more good borrowers left.  Governments will continue to try and make up the difference but what happens when a debt auction fails?  Do you think they will quietly try and monetize it or do you think they will try and raise rates?

I really don't know.  I still think this has to end in inflation but I am no longer convinced that we could not go through some severe deflation before we get there.

I honestly don't know. We could. They could print. I think possibly Bernanke could use QE secretly (under the guise of Other Households) to purchase failed auctions hiding the true bid to cover ratio and make the "Bond Vigilantes" look like they were in the room up against a 900# gorilla leaving rates at 0.

The entire point of my write was just to point out that devaluations happen and could happen, ESPECIALLY in this day and time.

I didn't want to get into a inflation/deflation debate with anyone, I just wanted to point out Precchter missed a point, a big point.

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Re: What the Deflationist Campers Forgot to Put In Their ...
Woodman wrote:

In the case of Mexico or a potential devaluation int he US, what happens to prices of goods and what happens to debt?   I read up a little on the Mexican peso crisis but am confused still how it's in the interest of a government to do this or that the US could do it effectively.  

tom 

Hello Tom: I've asked myself that question. In all honesty, I think they are trying to do a slow gentle devaluation hoping it won't go Wiemar or Zimbabwe on them. Either way the price of goods will be insane. If wages stayed pegged to new dollars and debt stayed pegged to old dollars it would be the equivalent to everyone getting all their debt paid off and I'm sure we'd have massively higher prices. The only certain thing I see is they are scr#wed no matter what they do.

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Re: What The Deflationist Campers Forgot to Pack...
goes211 wrote:

Davos,

Maybe Prechter's statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it? 

It's already been done. 

The Plaza Accord or Plaza Agreement was an agreement between the governments of FranceWest GermanyJapan, theUnited States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Markby intervening in currency markets. The five governments signed the accord on September 22, 1985 at the Plaza Hotel in New York City.

The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987.

http://en.wikipedia.org/wiki/Plaza_Accord

 

 

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Re: What The Deflationist Campers Forgot to Pack...
machinehead wrote:
goes211 wrote:

Davos,

Maybe Prechter's statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it? 

It's already been done. 

The Plaza Accord or Plaza Agreement was an agreement between the governments of FranceWest GermanyJapan, theUnited States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Markby intervening in currency markets. The five governments signed the accord on September 22, 1985 at the Plaza Hotel in New York City.

The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987.

http://en.wikipedia.org/wiki/Plaza_Accord

 

 

Machinehead's head is like a financial super computer of facts. Good read, thanks!

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Re: What The Deflationist Campers Forgot to Pack...
Davos wrote:

They could easily say tomorrow, by announcement from Obama and Geithner that our dollar is now known as the "Old US Dollar" and they could hold up one "New US Dollar" and say, "Effective today these old dollars are no longer accepted by any bank, bring us 1,000 old dollars and we will give you 1,000 new dollars.

Could they really?   Article 1 Section 8 clearly gives Congress the power "To coin Money, regulate the Value thereof, and of foreign Coin"?  I don't think the executive branch can do anything of the sort without approval of Congress.

machinehead wrote:
goes211 wrote:

Davos,

Maybe Prechter's statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it? 

It's already been done. 

The Plaza Accord or Plaza Agreement was an agreement between the governments of FranceWest GermanyJapan, theUnited States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Markby intervening in currency markets. The five governments signed the accord on September 22, 1985 at the Plaza Hotel in New York City.

The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987.

http://en.wikipedia.org/wiki/Plaza_Accord

Is that really a relevant comparison?  A bunch of governments that got together and collectively decided to depreciate one currency by 50% relative to another over a multi year period.   I thought we were talking about US dollars unilaterally and immediately changing its exchange rate to other currencies by some sort of decree.   Seems like an apple to oranges comparison. 

What happens if the other countries don't want their currencies to appreciate relative to USD?

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Re: What The Deflationist Campers Forgot to Pack...
goes211 wrote:
Davos wrote:

They could easily say tomorrow, by announcement from Obama and Geithner that our dollar is now known as the "Old US Dollar" and they could hold up one "New US Dollar" and say, "Effective today these old dollars are no longer accepted by any bank, bring us 1,000 old dollars and we will give you 1,000 new dollars.

Could they really?   Article 1 Section 8 clearly gives Congress the power "To coin Money, regulate the Value thereof, and of foreign Coin"?  I don't think the executive branch can do anything of the sort without approval of Congress.

machinehead wrote:
goes211 wrote:

Davos,

Maybe Prechter's statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it? 

It's already been done. 

The Plaza Accord or Plaza Agreement was an agreement between the governments of FranceWest GermanyJapan, theUnited States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Markby intervening in currency markets. The five governments signed the accord on September 22, 1985 at the Plaza Hotel in New York City.

The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987.

http://en.wikipedia.org/wiki/Plaza_Accord

Is that really a relevant comparison?  A bunch of governments that got together and collectively decided to depreciate one currency by 50% relative to another over a multi year period.   I thought we were talking about US dollars unilaterally and immediately changing its exchange rate to other currencies by some sort of decree.   Seems like an apple to oranges comparison. 

What happens if the other countries don't want their currencies to appreciate relative to USD?

You bring up an excellent point about the Constitution - but then again so does Ron Paul when he questions the Fed about COINS. So my guess is vis-a-vis blatant historic we are going to do it or the 2008 scare you into voting on it - this can be done. 

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Re: What The Deflationist Campers Forgot to Pack...
machinehead wrote:
goes211 wrote:

Davos,

Maybe Prechter's statement is technically incorrect but I am not so sure it is totally incorrect.  How exactly would the USD devalue?  Would the President, Bernanke, or Geithner get on TV and announce it?   How would they enforce it? 

It's already been done. 

The Plaza Accord or Plaza Agreement was an agreement between the governments of FranceWest GermanyJapan, theUnited States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Markby intervening in currency markets. The five governments signed the accord on September 22, 1985 at the Plaza Hotel in New York City.

The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987.

http://en.wikipedia.org/wiki/Plaza_Accord

What happened in 1985 is only possible if the other parties (Europe, Japan, UK) are willing.  They were willing back then for a variety of reasons, but today, it is not in Europe's or Japan's or anyone else's  (i.e. China's) interest to have their currencies appreciate vs the dollar.  They want the total opposite to happen.

In theory, the US could revalue the dollar simply by printing gobs of it, assuming it's politically possible (which I do not think it is), but what is to stop those other economies from doing the same thing to compensate for the trade imbalances that would result?  Then we would just be in a competitive devaluation race to the bottom.  And yes, gold would shine in such a scenario, but I just do not see that scenario as being possible right now.

As a side-note, I do not believe China's recent de-pegging from the dollar is going to result in Renmenbi appreciation against the dollar.  In fact, the total opposite will happen.  China would never depeg if they believed that would result in appreciation vs the dollar, and I do not care what they say about "de-pegging", there is no such thing as depegging when you do not allow your own citizens to hold dollars anyway.  The country manages the currency totally, no matter what they say.  This entire "shift" on their part is nothing more than a political ploy to keep currency manipulation off the G20 agenda in this weekend's meeting in Canada.  Watch what happens after the G20 meeting and we'll know where the RMB is going to go.  I'm all in on it depreciating rather than appreciating.  I also plan a concurrent bet on watching Timmy-boy-Geithner's head explode when he watches the "floating" RMB depreciate vs. Uncle Buck.

 

 

 

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Re: What the Deflationist Campers Forgot to Put In Their ...

Interesting article Davos.  If prices start to go up, I suspect we will be witnessing "stagflation" which is worse than inflation.

From Wiki:

  • In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time
  • In economics, the term stagflation refers to the situation when both the inflation rate and the unemployment rate are high. It is a difficult economic condition for a country, as both inflation and economic stagnation occur simultaneously and no macroeconomic policy can address both of these problems at the same time

Traditionally, inflation occurs when the amount of money starts to exceed goods and services but I don't think we will see this type of inflation.  If prices start going up, I think it will most likely be because of shortages (oil for example) or from new currencies challenging the status of the dollar as the sole international currency.  

Larry

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Re: What the Deflationist Campers Forgot to Put In Their ...

Maybe I missed an explanation on this specific point that  KenC's brought up.  Just because we have always loaned money into existence doesn't stop the TPTB from taking the simpliest approach and just print (Non LOANED THIN AIR Money) and find a stealth way of distributing these dollars.  It seems over the past two years the govt has appropriated taxpayer money and said it was going to spend it on X and they spent it on Y.

Assumption In The Questions Below: Goverments have always been dishonest and only let you know what they want you know!!!!

Question 1: How do we know that pure thin air printing (Without Loan) is not going on now?

Question 2: If the govt isn't printing non loaned money now, then why would it not be the very first tactic in fighting bond auction failures and or a devasting  bout of deflation?

Bottom Line: Are there any independent monthly / quarterly money supply reports / mechanisms that cannot be manipulated. If not how would the U.S. citizens, pensioners, foreign creditors really know what is going on with most of the money supply now being digital. 

Everyone got a good laugh at the Bernacke's helicopter analogy. But sometimes with the intent, you are told an absolute truth that sounds so implausable and is interpreted as unimaginable to throw you off track and it turns out to be the exact future reality.  Comments please.

Thanks Michael

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Re: What the Deflationist Campers Forgot to Put In Their ...

I have followed Bob Prechter's arguments for the best part of a decade in his monthly Theorist. His 2003 publication - Conquer the Crash - is still the best description and explanation of the global monetary system. The significant points he makes are:

There is a world of difference between a credit inflation and a greenback printing operation. The mainstream media and the blogosphere constantly refer to the government/Treasury/Federal reserve rolling the printing presses which gives the impression that greenback cash notes are pouring into the money supply. Actually, there are less than $1 trillion of US dollar notes in existence and most of them are thought to reside outside the United States. On top of this sits some $12 trillion of US Federal debt plus unfunded liabilities of $50 trillion more.

The Fed has created $1.5 trillion of new money as it has expanded its balance sheet to $2.3 trillion by buying IOUs. But it is hardly likely to buy up the rest of US government and private sector IOUs, let alone the 100s of trillions of worldwide debt denominated in US dollars. It is, after all, a bank and its losses are guaranteed by all other US banks which are part of the Federal reserve system. It did not buy Fannie and Fredddie IOUs until they were guaranteed by the US treasury. It is important to understand that the Fed only creates new money when it buys IOUs but it is not creating inflation because it is taking assets (the IOUs) out of the system. In fact M3 is contracting at the fastest rate since the 1930s. Stockmarkets are well below the level of the year 2000 and commodities are half the level of 2 years ago and housing is still tanking (mortgage writing has just fallen to a new low). So despite an explosion in the monetary base over the last decade (as much as the previous 200 years!) even gold is struggling to reach the same level (in inflation adjusted terms) as it reached 30 years ago.

The US dollar has confounded everyone with its strength. The usual explanation is the "flight to safety". This is a bizarre explanation. What is safe about a country as indebted as the United States? Major US banks would be most likely insolvent if they marked their non-performing assets to market, unemployment remains very high despite the so-called recovery and the US is involved in the longest and most costly war ever. Consumers cannot afford to borrow and the banks would rather lend back to the Fed than to business. Most of the banks are involved in rampant speculation in the markets rather than conducting the traditional business of lending. Who needs a plunge protection team when you have the banks and high frequency trading?

The real reason for US dollar strength is deflation. Worldwide, the majority of debt is dollar denominated and there is a mass scramble for dollars to pay back debt sooner because it becomes more expensive later when in a deflation. That is that each dollar purchases more stock, more commodity or more property. It becomes self reinforcing as buyers wait on the sidelines and sellers capitulate.

Bob Prechter was also right in his scepticism towards devaluing the dollar. Against what? The Plaza agreement was just that - but can you imagine any of the Europeans wanting to revalue the Euro? They have problems enough and in addition they are talking austerity now. A rising Euro would not help. The Mexican example is surely a joke? The Peso is not the reserve currency of the world. That privilege is probably the best thing going for the US. It certainly allows debt to be rolled over more easily. It would not be a good look domestically for the US to be seen to be selling off its currency - the Fed, in any case, is supposed to maintain the strength of the US. dollar.

The government could issue vast amounts of Treasury bonds to the Fed but I doubt the bond vigilantes would take that without selling off the bond market and raising interest rates which would force the government to pay higher rates for its huge borrowings. This would siphon up money from everywhere else. The effect would be deflationary as the price of debt securities everywhere else fell.

Finally, the real heart of the Prechter argument is the socionomic backbone to the Elliott Wave Theory. Most people have not bothered to read the brilliant blue book on the theory or the Wave Principle of Human Social Behaviour. Just look around you. What do you see? Do you see an optimistic (inflationary) environment or a pessimistic (deflationary) one? How many people do you know who are expanding their business? Are you spending more or less?

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DrKrbyLuv
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Re: What the Deflationist Campers Forgot to Put In Their ...

Hello timeandtide,

Thoroughly enjoyed your well-written post.  I too am in the deflationist camp because our money supply inherently contracts as money is destroyed every day in principal debt repayment.  Unless new money is added at the same rate, the money supply will shrink.  And there is only one way to get new money into the system and that is through new debt.  This creates a perpetual spiral as the debt grows exponentially until it can no longer be sustained.  I think we are close to, or already past peak debt.

An important economic indicator that would be very helpful is a schedule of principal debt repayment.  This would quantify the negative force emanating from the constant destruction of money. 

One problem with the term "inflation" is that it is too general to precisely articulate what is occurring in the economy.  For example, does it simply mean prices going up?  Or does it mean prices going up because too much money is added to the system, outpacing the supply of goods and services?  Prices may go up for many reasons including shortages and the debauching of a currency and not necessarily because too much money is available.

Mexico is a good example of how a currency can be purposely debauched.  Mexico had refused to allow it's national currency to float and during the 1980's speculative raiders forced Mexico to borrow dollars to defend the value of the Peso.  Henry Liu wrote that Mexico's mistake was in keeping it's currency freely convertible into dollars.  

President Portillo warned in 1982 of "hidden foreign interests" that were trying to destabilize Mexico through panic rumors, causing capital flight out of the country.  By 1994, Mexico had restored its standing with investors.  It had a balanced budget, a growth rate of over 3% and a stock market that was up five-fold.  Newly elected President Ernesto Zedillo suddenly announced a 13% devaluation of the peso though no valid reason seemed to exist for such a move.  The following day, Zedillo allowed the formerly managed peso to float freely against the dollar , the peso immediately plunged by 39%

My point is that currencies can and are raided routinely by big money and the international banking cartel.  Mexico was punished for their nationalism in trying to protect their currency and resources from international forces.  This had nothing to do with traditional inflation as it was a financial attack pure and simple.  If you look at the events surrounding the Wiemar Republic "hyperinflation" or the Asian crisis of the late 1990's I think you will find that these currencies were successfully attacked.  They were not the result of natural economic forces or too much money.

Maybe we should stop using the term inflation on a wholesale basis and instead start using stagflation, currency attacks, money destruction and peak debt for a more accurate account of what is occurring in our economy.

Larry

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Re: What the Deflationist Campers Forgot to Put In Their ...

Well, Bob's answer is holding cash.

This one chart tells me that is not in my best interest.

Fiat Currencies heading to 0

From my latest write, Link.

Snippet:

The currency basket, filled with equal weights of worthless US dollars, euros, Swiss francs, yuans, Indian2 Goldrupees, British pounds, and Australian dollars, are, for the first time in history sledding down Fiat Hill heading in unison towards their intrinsic value of 0.

 A tabagogen ride to hell!

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Re: What the Deflationist Campers Forgot to Put In Their ...

Time and Tide, Prechter's argument doesn't make sense, because it is ill conceived. Devaluations as measured currency against currency aren't actually that relevent.  What is important is how fiat currencies stack up against goods, services, raw materials, and precious metals.  The cost of housing is dropping, as are all credit sensitive items, but this doesn't equal pure 'deflation'.  It only emphasizes how extreme the downward pressure on housing is, when nearly everything else is going up in price.  One of the reasons, the price of housing is dropping, is due to the inflationary pressures on day to day purchases.  Oil and food prices have doubled in the last 6 or 7 years, rendering Prechter's deflationary perspective null and void. Factoring in the plunging price of real estate and using intuition, I think what we are experiencing is bi-flation.

This Wikipedia link explains bi-flation pretty well. Whether the definition applies strictly to our current circumstances, I don't know--but if not exact, it's close.

http://en.wikipedia.org/wiki/Biflation

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The Beef and Nothing But The Beef

I have been as guilty as anyone in debating this subject to death, but I think its time that we put this argument behind us and recognize the common denominator to both perspectives:

In the near future, your not going to be able to afford the things that you and your family need to live.

Whether that occurs because an inflation raises the price of what is needed, or because deflation destroys your income is immaterial. The inconvenient truth is that no one asset (or approach) is going to protect you from all the vagaries of our future, whether that be gold, silver, cash, or bullets. It's just not going to be that simple.

The survival of each one of us will be a function of our ability to adapt to the unforeseen. There will be no easy, clear-cut decisions, and there will always be a juggling of probabilities and likelihoods in the decision-making process. When the day comes that your child's next meal depends on you making the correct decision, theoretical constructs and assumptions go out the window. 

If you really want to prepare for both the threat of inflation and the threat of deflation, you can't count on anything outside of yourself, your family, and your community (if your so lucky) to do it. Your going to have to provide for your own needs. Your going to have to become an Economy of One. This entails the following (to say the least):

  1. Emergency: Establishing a short-term buffer of water, food, cash, and other resources to ensure your survival in an emergency or crisis.
  2. Energy: Establishing a means of harvesting, storing, transforming, and distributing your own energy.
  3. Water: Establishing redundant sources of water, and the ability to store, filter, distribute, heat, and recycle that water.
  4. Food: Your going to have to produce your own food in a sustainable way, and learn to process, store, and cook that food in a manner that is consistent with health.
  5. Shelter: Your residence needs to be free of debt (liens and mortgages), energy efficient, well-kept, and hopefully in a lower tax zone.
  6. Healthcare: Your going to have to learn how to provide basic healthcare for your family, including basic dentistry. This includes adopting preventative dietary measures (see #4), producing and using your own medicinals, and learning basic first aid.
  7. Transportation: Your going to have to find a way to get around with very little traditional fuels.
  8. Trade: Your going to need to establish and/or join a local network of exchange/trade (because you really can't be an Economy of One).
  9. Savings: Your going to have to learn how to save purchasing power, and learn how to maintain and protect that purchasing power. 
  10. Without: Your going to have learn to live without.

So there is the beef at the heart of the inflation/deflation debate. It implies a great deal of time, effort, and money to become an Economy of One, and the learning curve is outrageous. The good thing is, as you go about this learning process, your going to meet like-minded people and become the Economy of Us.

Best....Jeff

 

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Romans12.2
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Re: What the Deflationist Campers Forgot to Put In Their ...

Jeff- So glad you gave me the checklist.  You know I read you guys every night and my favorite threads are these...I always want to write and scream "but what do I do!?"  I've stored stuff, I've saved cash, I've bought gold.  I guess I need to read that the difference in preparing for inflation or deflation does not matter - do both.  I assume that's what you all are doing even if you think you are pretty convinced of what's to come.   

What is worrying me now is security.  Everyone jokingly knows we are the preppers.  My kids friends have helped to unload countless truckloads of food and other supplies.  Our friends have heard us talk of fuel storage and water purification and canning our garden etc.  They all know!

That was not so smart.  We were so transparent because we wanted everyone we know to get prepared too.  But NO one is.

I spent an hour at the Verizon store in my small town today with a few women (strangers) and after small talk we spoke about the big storm last Thursday and how hard it was to be without power for three nights.  I mentioned casually how important it is to be prepared for more serious interruptions, just to get a feel for what kind of people they are.  You know, just to see the level of awareness.  

They all laughingly joked about the kind of people who dig bunkers, store food and hide gold.  One lady talked about crazy uncle Fred in Alabama who no one sees anymore because he won't come out of his compound.  But what REALLY shocked me was when they all remarked that "if things ever get that bad, then I don't want to survive anyway." All three of them said this!  "If there is Anarchy and people fighting for food, I don't want to live to see that."  WOW.  Maybe it's that simple.  Some of us want very much to survive anything that might come our way.  But many, many, probably don't and that's why they pretend to be blind to what is coming.  I looked at their children, and felt very sad.

I was quiet and listened, but I did say before I left "I bet if the shit hit's the fan, you'll be at crazy Uncle Fred house in no time."  And you know what?  She laughed and agreed.  So what do you think, will Fred let her in?

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Re: What the Deflationist Campers Forgot to Put In Their ...

There are a number of farmers across the world to feed those who are deemed at the time to be neccessary! There have always been those folk. I pity those who left the agrarian roots.

 

"ishould have stayed on the farm, I should have listened to my old man"

 

robie,husband father farmer optometrist

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SagerXX
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Re: The Beef and Nothing But The Beef
JAG wrote:

I have been as guilty as anyone in debating this subject to death, but I think its time that we put this argument behind us and recognize the common denominator to both perspectives:

In the near future, your not going to be able to afford the things that you and your family need to live.

Whether that occurs because an inflation raises the price of what is needed, or because deflation destroys your income is immaterial. The inconvenient truth is that no one asset (or approach) is going to protect you from all the vagaries of our future, whether that be gold, silver, cash, or bullets. It's just not going to be that simple.

The survival of each one of us will be a function of our ability to adapt to the unforeseen. There will be no easy, clear-cut decisions, and there will always be a juggling of probabilities and likelihoods in the decision-making process. When the day comes that your child's next meal depends on you making the correct decision, theoretical constructs and assumptions go out the window. 

If you really want to prepare for both the threat of inflation and the threat of deflation, you can't count on anything outside of yourself, your family, and your community (if your so lucky) to do it. Your going to have to provide for your own needs. Your going to have to become an Economy of One. This entails the following (to say the least):

  1. Emergency: Establishing a short-term buffer of water, food, cash, and other resources to ensure your survival in an emergency or crisis.
  2. Energy: Establishing a means of harvesting, storing, transforming, and distributing your own energy.
  3. Water: Establishing redundant sources of water, and the ability to store, filter, distribute, heat, and recycle that water.
  4. Food: Your going to have to produce your own food in a sustainable way, and learn to process, store, and cook that food in a manner that is consistent with health.
  5. Shelter: Your residence needs to be free of debt (liens and mortgages), energy efficient, well-kept, and hopefully in a lower tax zone.
  6. Healthcare: Your going to have to learn how to provide basic healthcare for your family, including basic dentistry. This includes adopting preventative dietary measures (see #4), producing and using your own medicinals, and learning basic first aid.
  7. Transportation: Your going to have to find a way to get around with very little traditional fuels.
  8. Trade: Your going to need to establish and/or join a local network of exchange/trade (because you really can't be an Economy of One).
  9. Savings: Your going to have to learn how to save purchasing power, and learn how to maintain and protect that purchasing power. 
  10. Without: Your going to have learn to live without.

So there is the beef at the heart of the inflation/deflation debate. It implies a great deal of time, effort, and money to become an Economy of One, and the learning curve is outrageous. The good thing is, as you go about this learning process, your going to meet like-minded people and become the Economy of Us.

Best....Jeff

IMO, this is hands down the most useful post I have seen vis-a-vis the inflation/deflation debate.  Stop haggling the details folks.  Get down to the brass tacks of prep and resilience -- as JAG has ever-so-eloquently laid out, it's going to be hair-raising whether it's IN or DE...flation.

Viva -- Sager

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Davos
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Posts: 3620
Re: The Beef and Nothing But The Beef
SagerXX wrote:
JAG wrote:

I have been as guilty as anyone in debating this subject to death, but I think its time that we put this argument behind us and recognize the common denominator to both perspectives:

In the near future, your not going to be able to afford the things that you and your family need to live.

Whether that occurs because an inflation raises the price of what is needed, or because deflation destroys your income is immaterial. The inconvenient truth is that no one asset (or approach) is going to protect you from all the vagaries of our future, whether that be gold, silver, cash, or bullets. It's just not going to be that simple.

The survival of each one of us will be a function of our ability to adapt to the unforeseen. There will be no easy, clear-cut decisions, and there will always be a juggling of probabilities and likelihoods in the decision-making process. When the day comes that your child's next meal depends on you making the correct decision, theoretical constructs and assumptions go out the window. 

If you really want to prepare for both the threat of inflation and the threat of deflation, you can't count on anything outside of yourself, your family, and your community (if your so lucky) to do it. Your going to have to provide for your own needs. Your going to have to become an Economy of One. This entails the following (to say the least):

  1. Emergency: Establishing a short-term buffer of water, food, cash, and other resources to ensure your survival in an emergency or crisis.
  2. Energy: Establishing a means of harvesting, storing, transforming, and distributing your own energy.
  3. Water: Establishing redundant sources of water, and the ability to store, filter, distribute, heat, and recycle that water.
  4. Food: Your going to have to produce your own food in a sustainable way, and learn to process, store, and cook that food in a manner that is consistent with health.
  5. Shelter: Your residence needs to be free of debt (liens and mortgages), energy efficient, well-kept, and hopefully in a lower tax zone.
  6. Healthcare: Your going to have to learn how to provide basic healthcare for your family, including basic dentistry. This includes adopting preventative dietary measures (see #4), producing and using your own medicinals, and learning basic first aid.
  7. Transportation: Your going to have to find a way to get around with very little traditional fuels.
  8. Trade: Your going to need to establish and/or join a local network of exchange/trade (because you really can't be an Economy of One).
  9. Savings: Your going to have to learn how to save purchasing power, and learn how to maintain and protect that purchasing power. 
  10. Without: Your going to have learn to live without.

So there is the beef at the heart of the inflation/deflation debate. It implies a great deal of time, effort, and money to become an Economy of One, and the learning curve is outrageous. The good thing is, as you go about this learning process, your going to meet like-minded people and become the Economy of Us.

Best....Jeff

IMO, this is hands down the most useful post I have seen vis-a-vis the inflation/deflation debate.  Stop haggling the details folks.  Get down to the brass tacks of prep and resilience -- as JAG has ever-so-eloquently laid out, it's going to be hair-raising whether it's IN or DE...flation.

Viva -- Sager

Indeed it is a super post and I'm 100% in agreement. Having said that not owning PM's in a time of hyperinflation will be devastating. Zimbabwe took gold for food at the end of their ordeal. People were pan handling rivers for nuggets so they could eat.

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Ruhh
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Re: What the Deflationist Campers Forgot to Put In Their ...

I'm not usually the type for the "Me too" posts, but that was great, JAG!

I appreciated Romans12.2 anecdote. I'm trying to use them more often while talking to friends and family. I've learned that most people learn more from stories than they do from statistics.

Agitprop's comment on Biflation hits it on the head as well.

I wish there was a "Like" button on these posts but this will have to do for now.

I think the kind of *flation will depend greatly on where you live. Either way building personal and community resilience should be everyone's highest priority. Unfortunately I feel many readers around here are still too focused on wealth preservation with hopes they can buy their way out of the SHTF path. Hopefully your likes will be deselected to the benefit of all. That might sound harsh but it's a good start to reducing our numbers.

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Romans12.2
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Posts: 227
Re: What the Deflationist Campers Forgot to Put In Their ...

Davos please - I believe you are right about gold for the long run as the ticket back into the game.  But how much? 

I know it's a personal question, but I would love to know what people who think like you are doingSmile

We have physical gold and cash about 50/50 right now. 

After reading you (I think) a few weeks ago, you said something about it not mattering if you buy at $200 or $1200 - it's still time to buy. 

My husband was motivated again and we bought another 6oz.right then at 11pm.

Do you think any cash is good to hold or not?  And you never mention other metals...do you hold silver too?

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Davos
Status: Diamond Member (Offline)
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Posts: 3620
Re: What the Deflationist Campers Forgot to Put In Their ...
Romans12.2 wrote:

Davos please - I believe you are right about gold for the long run as the ticket back into the game.  But how much? 

I know it's a personal question, but I would love to know what people who think like you are doingSmile

We have physical gold and cash about 50/50 right now. 

After reading you (I think) a few weeks ago, you said something about it not mattering if you buy at $200 or $1200 - it's still time to buy. 

My husband was motivated again and we bought another 6oz.right then at 11pm.

Do you think any cash is good to hold or not?  And you never mention other metals...do you hold silver too?

Personally: 100%. 10-20% is silver, excludes real property. IMO the dollar is done. Every currency is done. For the first time in history they got baked together. They'll be burnt to a crisp in days, weeks or months is my personal take. I suspect the IMF will float a new currency as a reserve currency but I suspect unless they seize all the gold and or pool the CB's of the world's gold that it will be a Fiat mess.

Either way I'd consider myself a moron if I put anything in a chart doing this:

Fiat Currencies heading to 0

All the currencies of the world are circling the drain together. Folks are looking and saying the Dollar is strong against the Euro this week, or the this is strong against the that next week. But the fact of the matter is the world is Greece. Every (paper) currency is getting flushed. Big picture.

That's just me: I personally think that diversification means one has questions about what will happen. I could be wrong, but this seems pretty simple to me.

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Romans12.2
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Re: What the Deflationist Campers Forgot to Put In Their ...

Gulp.

You could be wrong, but I think your right.  Leap of faith here I come!

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Davos
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Re: What the Deflationist Campers Forgot to Put In Their ...
Romans12.2 wrote:

Gulp.

You could be wrong, but I think your right.  Leap of faith here I come!

I certainly could be wrong. But I'd trust my dead dog's decision before I trusted Bernanke, Geithner, Summers or the rest of the morons up there. And Copper was a nice dog but dumber than a bag of rocks.

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