Inflation versus deflation debate for Red Pill consumers

[EJ]

Re: Inflation versus deflation debate for Red Pill consumers

In Support of this argument is the following piece of history
Climbing Out of the Great Depression

Many forget it was the event of The Great Depression that created the political mandate to prevent a repeat: give us activist central banks and inflationary government policy! So here it is.

It's an election year. There may be recession, if that's useful to get Hillary elected as it was to get Bill elected, but no catastrophe. After that, who knows.

If you are in business, I will give you an analogy. Imagine you are VP Sales. One day your boss, the CEO, comes into your office. He says, "We are very close to closing a round of funding. If we close the funding we may survive to be a great company and make everyone rich. If we do not close the funding we will fail and never know. It's up to you."

Of course the VP Sales has the pipeline to make a huge quarter if he jams on his guys to close all the deals, but he'll blow the rest of the year.

That's what's going on now in the Fed and US government. Take it from an ex-CEO and ex-VP Sales.

p.s. No, I never did this myself, but I have had it done to me.

[EJ]

Re: Inflation versus deflation debate for Red Pill consumers

How does foreigners buying US infrastructure
1) create jobs for the average Joe
2) Keep the average Joe in his house
3) prevent lots of small businesses (nail salons restaurants etc) from going bankrupt
4) Pay the overhead at large corporations like Lowe's Target Home Depot that have overexpanded
5) etc etc

even assuming such a wave of selling infrastructure were to occur. The big problem (for now) is
a) consumer debt
b) corporate debt
c) corporate over expansion
d) excessive leverage

So IF selling infrastructure occurred how does it address the above issues.

A second problem is assuming foreigners would want to buy much of our crumbling infrastructure in the first place. Not that it can't happen but didn't we just burn them tremendously on CDOs etc. Perhaps that have learned a lesson.

A 3rd and not insignificant problem is determining a fair price for it.

A 4th problem in say selling roads or whatever is that tolls will have to be charged where perhaps no tolls were charged before so in essence consumer costs will go up.

A 5th problem is believing that can happen soon enough to matter

a 6th problem is assuming the government would do this on a massive enough scale to matter in the first place

But even ignoring #2-#6 I fail to see how it solves any problems.

Mish

Your thoughtful response brings into focus the fact that we have been developing in our respectful but open crucible of criticism the idea that the next instantiation of the FIRE Economy is alternative energy and infrastructure focused. To anyone new here, that probably sounds nuts. But the political and behavioral economic determinants and indicators (e.g., the pending legislation that bill has diligently dug up) point in that direction, plus it fits the criteria we have defined.

I know it must seem like we talk in a weird language here, but we've been at this for going on ten years, so please bear with us. No mean spiritedness here but due diligence.

[bill]

Re: Inflation versus deflation debate for Red Pill consumers

How does foreigners buying US infrastructure
1) create jobs for the average Joe
2) Keep the average Joe in his house
3) prevent lots of small businesses (nail salons restaurants etc) from going bankrupt
4) Pay the overhead at large corporations like Lowe's Target Home Depot that have overexpanded
5) etc etc

even assuming such a wave of selling infrastructure were to occur. The big problem (for now) is
a) consumer debt
b) corporate debt
c) corporate over expansion
d) excessive leverage

So IF selling infrastructure occurred how does it address the above issues.

A second problem is assuming foreigners would want to buy much of our crumbling infrastructure in the first place. Not that it can't happen but didn't we just burn them tremendously on CDOs etc. Perhaps that have learned a lesson.

A 3rd and not insignificant problem is determining a fair price for it.

A 4th problem in say selling roads or whatever is that tolls will have to be charged where perhaps no tolls were charged before so in essence consumer costs will go up.

A 5th problem is believing that can happen soon enough to matter

a 6th problem is assuming the government would do this on a massive enough scale to matter in the first place

But even ignoring #2-#6 I fail to see how it solves any problems.

Mish

Please join the Select group so you can read many of my postings and get the answers you seek.
Look at Bear Stearns potential purchasers, seems to be a lot of interest when the deal has real value.
http://business.timesonline.co.uk/to...cle2540453.ece

Shares in Bear Stearns surged 8 per cent on Wall Street yesterday on rumours that America’s fifth-biggest bank is in serious talks over the sale of a 20 per cent stake to investors including Warren Buffett.

It is thought that the Bank of America, Wachovia, the US mortgage lender, and two Chinese groups, Citic Group and China Construction Bank, were also interested in grabbing a stake in Bear Stearns.

[Mish]

Re: Inflation versus deflation debate for Red Pill consumers

Alternative energy is far easier to understand. Assume for a second that we could harness fusion and have free energy that fueled the electric grid as well as all means of transportation.

We don't need no stinking wars in Iraq.
Homeowners heat and air condition their houses for free.
Big cars? No problem.
Personalized flying saucers?
Why not?

I believe if the govt left energy alone we would be much further along. The market will solve the energy crisis if govt would ever let it. Instead we have ethanol policies driving up the price of corn and everything that eats corn.

Heck if the govt would just legalize hemp it would be of far more use in producing biofuels that corn ever will. And it does not have to be planted every year either.

I am not an energy guy so perhaps this is far off base, but what if instead of wasting $trillions in Iraq the US purchased a bunch of nuclear reactors and heated the earth extracting oil from oil shale. Could that have been done for the amt of money we blew?

Still that is a huge cost. To really have an effect we need something that is nearly free. Free energy would certainly get things humming.

Selling off pieces of infrastructure doesn't work in my mind. The problem with alternative energy is that we really don't seem to be close by most peoples assessment.

The credit problem is arguably now.
Mish

[GRG55]

Re: Inflation versus deflation debate for Red Pill consumers

How does foreigners buying US infrastructure
1) create jobs for the average Joe
2) Keep the average Joe in his house
3) prevent lots of small businesses (nail salons restaurants etc) from going bankrupt
4) Pay the overhead at large corporations like Lowe's Target Home Depot that have overexpanded
5) etc etc

even assuming such a wave of selling infrastructure were to occur. The big problem (for now) is
a) consumer debt
b) corporate debt
c) corporate over expansion
d) excessive leverage

So IF selling infrastructure occurred how does it address the above issues.

A second problem is assuming foreigners would want to buy much of our crumbling infrastructure in the first place. Not that it can't happen but didn't we just burn them tremendously on CDOs etc. Perhaps that have learned a lesson.

A 3rd and not insignificant problem is determining a fair price for it.

A 4th problem in say selling roads or whatever is that tolls will have to be charged where perhaps no tolls were charged before so in essence consumer costs will go up.

A 5th problem is believing that can happen soon enough to matter

a 6th problem is assuming the government would do this on a massive enough scale to matter in the first place

But even ignoring #2-#6 I fail to see how it solves any problems.

Mish

Mish: Agree that it won't "solve" any problems, but the selling of "infrastructure" would seem to be another step in the slow transfer of wealth from debtor to creditor already underway.

As you have previously pointed out (on your blog), with each passing day there is less incentive for foreigners to buy/hold US$ financial instruments, and increasing incentive to exchange accumulating $'s for something more tangible. The actions of Arab GCC SWFs (three Canadian natural gas companies, the Dubai, Nasdaq & Qatar menage a trois over the OMX, a bid for UK's Sainsbury supermarkets, the thwarted Dubai Ports bid - just a few recent examples) are credible indications that you are absolutely correct in this regard.

If they are politically impeded from directly purchasing US assets, China and the Arabs have clearly signalled they will invest through intermediaries (Blackstone, Carlyle) or exchange $'s for another fiat currency and go hunting in the UK, Europe, Canada, Australia, wherever. Given they are unlikely to covet McMansions, some of the reasons infrastructure ownership transfer might occur include:

• Much infrastructure is in public hands, suffers from years of under-investment, and therefore could transfer at bargain prices (civil servants are dealing with OPM, so what do they care?);
• I expect some will transfer at zero initial purchase price under the rubric of "public-private partnerships", a fashionable concept heartily embraced by Third Way Labourites and Democrats ("...a splendid idea, Madam President...");
• Public officials see a way to avoid once again the immediate need to raise taxes, deflecting the potential ire of voters. Officials seeking re-election can campaign on the dual platform of fiscal rectitude and safer bridges. Given a choice between higher taxes - to fix the crumbling infrastructure - or burning the remaining furniture to heat the house, which way do you think debt-burdened voters will lean?
• Tolls will most certainly be charged. Perhaps another example of Todd Harrison's inflation in things we need, deflation in things we want?
• Wall St (and the City) can generate handsome advisory and transaction fees from the process - possibly the most compelling reason to believe in this scenario (?). The tolls will be no problem for them as long as the Hamptons heliport isn't privatized.
• It may not happen soon enough, or on a massive enough scale, to matter. But then what really matters? Fixing the real underlying problems or finding another way to generate outsized income for the high priests of the FIRE economy?
• To turn it into a full blown mania, late in the process Wall St will have to invent a mechanism for the public to participate in a big way. My guess is that Wall St will generate another round of transaction fees as the assets are distributed to the public (and what's left of their pension plans) at inflated prices. For Wall St. this is the reason to prevent China and the Arabs from direct ownership (they never sell), and force them to funnel their money through Blackstone et. al.

In respect to the larger issue of deflation vs inflation, perhaps best for all of us to keep both our eyes and mind open - the arguments are compelling on both sides, and the potential for a "monetary policy accident" that accelerates the deflationary scenario is "currently elevated" (to inject a little Fedspeak).

[Charles Mackay]

Re: Inflation versus deflation debate for Red Pill consumers

I'm not sure that all this mental masturbation over whether there will be hyperinflation or deflation and default (in US dollar terms) is useful... anymore than discussing whether there will be inflation or deflation in Peso terms.

Year 2000 was when it all rolled over. Now, if you chart stocks or houses or bonds in terms of monetary metal you will see that we clearly topped in 2000-2001. All things paper are now going down in value. If you will just hold monetary metal until houses sell for 100 oz of gold and the DJIA sells for 1 oz of gold you will then know when the bottom occurs and the next upswing is in progress.

BTW, Michael Hudson makes a nice analysis but he sure is a poor investor. "He and his wife are in CD's" he says. Well, that paper is going into the toilette!

[FRED]

Re: Inflation versus deflation debate for Red Pill consumers

I'm not sure that all this mental masturbation over whether there will be hyperinflation or deflation and default (in US dollar terms) is useful... anymore than discussing whether there will be inflation or deflation in Peso terms.

Year 2000 was when it all rolled over. Now, if you chart stocks or houses or bonds in terms of monetary metal you will see that we clearly topped in 2000-2001. All things paper are now going down in value. If you will just hold monetary metal until houses sell for 100 oz of gold and the DJIA sells for 1 oz of gold you will then know when the bottom occurs and the next upswing is in progress.

BTW, Michael Hudson makes a nice analysis but he sure is a poor investor. "He and his wife are in CD's" he says. Well, that paper is going into the toilette!

Yep. Time to update our 2001 Gold/DOW chart:

Ok, so which of you wants the title "Chief Curmudgeon" added to your title? You or Jim Nickerson?

[Charles Mackay]

Re: Inflation versus deflation debate for Red Pill consumers

Ok, so which of you wants the title "Chief Curmudgeon" added to your title? You or Jim Nickerson?

Hey, I'll take it since I'm a big H.L. Mencken fan!

I will follow this post with my R.E/GD chart as soon as I resize it....

[FRED]

Re: Inflation versus deflation debate for Red Pill consumers

Hey, I'll take it since I'm a big H.L. Mencken fan!

I will follow this post with my R.E/GD chart as soon as I resize it....

You got it!

Now who wants Chief Conspiracy Theorist?

[Charles Mackay]

Re: Inflation versus deflation debate for Red Pill consumers

OK, sorry that this will look like a "brag and moan" post but I did nail this one pretty good and part of it was luck. I sold my Seattle house in June 2001 and put the proceeds into gold based on the '69 top in Median Existing Houses priced in gold. So far it is working out precisely as forecast.

p.s. I see that John Rubino posts here now. I guess he will now know who Charles Mackay is because I corresponded with him on this information a few years ago ;) ... Hi John!

Anyway, just wait for 100 oz median existing houses and then buy!
Charles

[GRG55]

Re: Inflation versus deflation debate for Red Pill consumers

OK, sorry that this will look like a "brag and moan" post but I did nail this one pretty good and part of it was luck. I sold my Seattle house in June 2001 and put the proceeds into gold based on the '69 top in Median Existing Houses priced in gold. So far it is working out precisely as forecast.

p.s. I see that John Rubino posts here now. I guess he will now know who Charles Mackay is because I corresponded with him on this information a few years ago ;) ... Hi John!

Anyway, just wait for 100 oz median existing houses and then buy!
Charles

Would you care to plot this based on the price of a median Seattle home? The price of which I understand is still defying gravity. Another conumdrum! Call the Maestro...

[Charles Mackay]

Re: Inflation versus deflation debate for Red Pill consumers

Would you care to plot this based on the price of a median Seattle home? The price of which I understand is still defying gravity. Another conumdrum! Call the Maestro...

GRG, my former Seattle house had a 50% increase after I sold in 2001 but gold has almost tripled. The math is still on my side by a large margin.

[bart]

Re: Inflation versus deflation debate for Red Pill consumers

Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

No one to date has countered this logic. Not a single person. People believe in the Fed's ability to inflate. I don't for the reasons above.

I've countered it a few times but not here on iTulip.

Although Kasriel is correct about base money being pumped by the Fed during the Great Depression (the light blue line below) and the Fed tried to loosen up on credit, that was pretty much all they did. They did not, for example, print cash (about 1/2 of M1) as is shown by the following chart:





They also allowed many thousands of banks to fail rather than mount rescue operations or encourage Congress to do the same. They didn't make that mistake in the '80s or '90s or recently.

They were also quite slow in lowering the discount rate from its 6% peak in 1929. It didn't get down to 2.5% until mid 1931, and then actually was moved back up to 3.5% until mid 1933.
There's more data like this too.

On Japan, I maintain that Japan simply did not try very hard (or hard enough) to offset the deflation. When they really did pump in the period 2002-3, the reaction was unmistakable - the Nikkei and real estate, etc. did bottom and start back up.





Basically, I believe Bernanke is much closer to being right than Mr. Kasriel... and its the only broad area in which I disagree with Mr. Kasriel.

[jk]

Re: Inflation versus deflation debate for Red Pill consumers

mish,
i just want to add one point to grg55's excellent exposition of the infrastructure argument above: there is infrastructure - highways, bridges, electrical transmission lines, sewers, water lines, gas lines, etc - in every congressional district. and there are infrastructure contractors in every district. when the economy is going into the toilet and the fed has dropped rates to zero, don't you think uncle sugar is going to find some ways to spend money to prime the pump? ted stevens got a quarter billion dollar bridge to nowhere when the economy was doing fine. what do you think he might want if his local economy were sputtering?

p.s. i know an entity that is always willing to borrow, and which can always find a lender. the government. the consumer is tapped out, corporations are leveraging up as part of private equity deals or to avoid a private equity deal. the government has plenty of debt, but it can always issue more, and if necessary that debt can be monetized. so your condition of a willing borrower and lender is met by uncle sam.

[Rajiv]

Re: Inflation versus deflation debate for Red Pill consumers

My question to you is "How did you time the 'Peak' so accurately?"