The deflation case: caught, gutted, poached and eaten

[Jim Nickerson]

Re: The deflation case: caught, gutted, poached and eaten

Application of the same medicine that caused two major recessions and repaired the economy in the early 1980s will lead to a depression today. The most significant difference between today versus 1980 is that the majority of US households have negative net worth vs sufficient savings to weather a lengthy recession.

The median US household has enough savings net of liabilities at current rates to support 18 weeks of cash flow vs 30 just eight years ago.

Such fragile balance sheets mean US households are in no state to experience the medicine that is needed to manage inflation fueled by a declining currency.

It is a dire conundrum.

Well consider a dying patient with a fatal disease, how much might this country spend to keep it going, if the country were a doctor? Perhaps it is a depression that is most needed to allow all the craziness that has occurred to be corrected and a new footing established. Ain't nothing in this country really going to change until is it hog-tied and forced to take its medicine without consideration for the subsequent pain of having done so, but only that do I think will start things to get truly better.

[GRG55]

Re: The deflation case: caught, gutted, poached and eaten

Nice substantive post, GRG, I think if the equity markets were to be much lower--say have taken out the November lows--in 12 days, then the Fed will cut probably 0.5% as that is the last number I read somewhere the Fed futures were indicating. The FOMC is spineless in my opinion and is unwilling to allow the needed medicine to be taken by the economy. If the market were to substantially rally from here, who knows, they might not do anything.

The Fed just looks out on a limb now. Marc Faber, in the Bloomberg interview you recently posted, agrees with your sentiments about the FOMC and Bernanke ("He will destroy the Dollar")

However, Finster posted an item (on his "stagflation" thread) yesterday from a Fedhead speaking in London that caught my attention. Maybe it was the inflation-sensitive European audience he was catering to, but said Fedhead acknowledged that maybe, just maybe, a slowing economy and slowing inflation may not go hand-in-hand. This sort of hint gets my sensors tingling. Gold, silver, oil and grains on the verge of going parabolic don't do anything to calm the nerves either. ;)

Judging by the change in tone of commentators (very few now trying to sugarcoat it), this credit crisis now out in the open for all to see. Is there anyone on the face of the earth, even Hank Paulson, that believes that monolines desperate to raise capital deserve the AAA ratings the agencies continue to accord them? Anyone?

Wow. What an Orwellian world... :p

[bill]

Re: The deflation case: caught, gutted, poached and eaten

The Feds new open "lets talk to the people policy" is not by accident it was planned as a tool to be more involved as they cranked up of the control lever. The feds years of monetary expansion were well planned and to think they don’t have a plan to control the aftermath of such monetary expansion would be naive.
The feds main objective will be to keep the liquidity flowing, thus dollar tanks, inflation continues, public is strapped with debt and no savings, credit harder to obtain, job loss and a country with no savings and little industry. What’s next? LIQUADATION at some point of pain.
Maybe the fed can partnership with government and purchase assets to reflate their value.
Maybe a good partnership match would be the Feds open transparent policy with SWF since SWF need all the transparency support they can get. We can call it “Print and Repudiation Inc.”.

[c1ue]

Re: The deflation case: caught, gutted, poached and eaten

The Feds new open "lets talk to the people policy" is not by accident it was planned as a tool to be more involved as they cranked up of the control lever. The feds years of monetary expansion were well planned and to think they don’t have a plan to control the aftermath of such monetary expansion would be naive.
The feds main objective will be to keep the liquidity flowing, thus dollar tanks, inflation continues, public is strapped with debt and no savings, credit harder to obtain, job loss and a country with no savings and little industry. What’s next? LIQUADATION at some point of pain.
Maybe the fed can partnership with government and purchase assets to reflate their value.
Maybe a good partnership match would be the Feds open transparent policy with SWF since SWF need all the transparency support they can get. We can call it “Print and Repudiation Inc.”.

Hear, hear.

I second Bill's statement - Bernanke is fully channeling Burns right now.

Cut 'til you drop.

0.5% at next meeting.

[FRED]

Re: The deflation case: caught, gutted, poached and eaten

Hear, hear.

I second Bill's statement - Bernanke is fully channeling Burns right now.

Cut 'til you drop.

0.5% at next meeting.

Look familar? From the iTulip "About" page:

[WDCRob]

Re: The deflation case: caught, gutted, poached and eaten

Fred, EJ, other people smarter than me...

Is there any way Bernake would be prevented from pulling out all the stops to inflate this problem away? In other words, is it possible that he could decide to go full out per the (in)famous Helicopter speech, but be stopped by others?

[GRG55]

Re: The deflation case: caught, gutted, poached and eaten

Fred, EJ, other people smarter than me...

Is there any way Bernake would be prevented from pulling out all the stops to inflate this problem away? In other words, is it possible that he could decide to go full out per the (in)famous Helicopter speech, but be stopped by others?

I think what you are asking is - How does the rest of the world respond if there is now a real US Dollar crisis?

Do they start dumping the US Dollars they have accumulated? (who will take them, and in exchange for what?) Do they step in and try to save the value of their existing stash of US Dollars (and their export market) through a coordinated effort to buy more? What sort of political pressures might arise in the USA, in an election year, if Americans see a continued rapid decline in King Dollar? What if the Fed does a rapid, short term reverse on inflation, to put the fear-of-gawd in the short-of-US$ trade (which seems to be pretty well everyone now)?

Interesting times indeed.

And I remain convinced the possiblity of a counter-trend, counter-intuitive "surprise" is growing. But possibilities are by no means certainties.

[bill]

Re: The deflation case: caught, gutted, poached and eaten

Keep the "liquidity flowing"

http://www.bloomberg.com/apps/news?p...JAM&refer=home
March 7 (Bloomberg) -- The Federal Reserve plans to boost the amount of loans it plans to make to banks this month to offset a deepening credit crunch threatening to tip the U.S. economy into a recession.
The central bank increased the size of auctions of four- week funds to banks planned for March 10 and March 24, to $50 billion each from $30 billion previously. The Fed also said in a statement in Washington today that it will make $100 billion available through repurchase agreements.

http://www.bloomberg.com/apps/news?p...ltU&refer=home
U.S. Unexpectedly Lost 63,000 Jobs in February (Update3)

By Shobhana Chandra
March 7 (Bloomberg)
Minutes before the figures were released, the Fed said it will expand two short-term auctions this month to $100 billion to address ``heightened liquidity pressures'' in markets.
The Fed chairman referred to ``downside'' risks for the economy four times, including ``the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.''
Investors project the Fed will lower the benchmark interest rate by at least half a point between now and its next meeting on March 18, futures prices show.
Fed Outlook
The central bank's regional economic survey this week said ``the hiring pace slowed in various sectors and labor markets loosened somewhat in many districts,'' as economic growth cooled in eight of 12 regions since the start of 2008

[DrYB/C]

Re: The deflation case: caught, gutted, poached and eaten

The Fed will eventually arrest the dollar’s fall, but not until it is forced to take action, which leads us to the following question: What will force the Fed to take action:

a. commodity price inflation so high it reduces consumer spending to nothing except the bare essentials, i.e. consumer staples, or

b. “signs that the credit crisis is not spreading and deepening??”

Well, either:
1) a. and b. will occur simultaneously, or,
2) a. will occur before b. or
3) b. before a.

“The current recession has been set off by the simultaneous bursting of property and credit bubbles….Those two economic sectors collectively peaked at 78 percent of gross domestic product, or fully six times the share of the sector that pushed the country into recession seven years ago." (http://www.nytimes.com/2008/03/05/op...l?ref=opinion)

So, the American consumer is consumptively and, in many cases, financially bankrupt b/c his declining home value, high debt burdens, and negative savings has destroyed his ability to devour Chinese, Japanese, other Asian, and Middle Eastern imports, and, even if he were solvent, he couldn’t borrow to continue his voracious consumption, because, with the exception of the Fed, the credit/debt creation apparatus is broken beyond short-term repair.

Moreover, in this particular economic case, the inflated-asset-value-derived-consumption-based-economy case, the credit crisis cannot be halted until the consumer is made solvent, and the consumer can’t be made solvent, until his home values are re-inflated or the entire economy is restructured toward production instead of consumption.

With the exact credit creation mechanism that was used to inflate home values destroyed, home values will not re-inflate for quite some time. Additionally, the credit/debt creation apparatus that still exists, which is different from the exact credit creation mechanism that was used to inflate home values, is currently in no shape to support a restructuring of the economy toward production instead of consumption. Moreover, court cases are being filed and will be won or lost in a manner that ensures the credit/debt creation apparatus that still exists will only extend credit on the most responsible and risk free terms possible, which will only slow the restructuring of the economy. So, in the short to mid term, the consumer will not only, at a minimum, remain insolvent, but will, in all probability, see his levels of insolvency increase, as more debts become due that he can’t pay due to declining real income, negative savings and lack of access to credit.

The Fed can’t prevent the insolvency inflation, aka debt deflation, because it can’t, without the help of the private banking system’s fraudulent, inverted-pyramidal-Ponzi-debt securitization/derivatives apparatus, create credit on the scale needed to support a halt and a reversal of the deflation. And if the government tries a truly substantial rescue of the housing market to halt the deflation, the bond market will revolt. So the debt deflation will continue until all debts are discharged, which is a process that will become very interesting in the near future, as it will most likely lead to war on an international scale.

If the Fed’s actions are futile, then where will the credit it does extend eventually find itself?? That credit, along with not-so-insignificant amounts of the dollar credits possessed by the current account surplus countries, will find itself in other currencies that actually have value, or in short term cash equivalent securities, or in commodities, or in other hard assets. Why would anyone make major investments in a bankrupt economy that is clearly demonstrating exactly how bankrupt it is via its crashing housing and credit markets??

Again, since the sheer scale of the bust engulfs 78% of the U.S. economy, it should be obvious that the Fed’s normal growth inciting policies, without the help of the private sector’s securitization/derivatives apparatus, will be irrelevant. This is why the smart money has quickly moved into commodities, gold, and other currencies. It knows the Fed will inflate--which is why M3 is no longer published and why Bernanke was chosen to head the Fed in the first place--and it also knows the Fed can’t inflate enough to solve this national insolvency problem. It also knows the Bernanke Fed will inflate in a manner that will drastically reduce the value of the dollar, even more than it has already been reduced.

It will take many, many years for the U.S. to reach solvency again, yet it will not take many, many years for commodity-based inflation to get out of control, simply because those individuals in-the-know recognize that the U.S. is insolvent, and will all attempt to allocate their financial dollar resources in a manner that will ensure those resources maintain their value, i.e. they will allocate those resources toward commodities, etceteras, while the U.S. undergoes an insolvency-based debt deflation

The flight to these dollar-based commodity resources will exacerbate the U.S. debt deflation, as more of the U.S. consumers’ meager dollar resources will be diverted toward the purchase of basic needs goods that will be increasing in cost due to commodity inflation, while less of their meager dollar resources will go toward discretionary purchases, e.g. clothes, electronics, automobiles, etceteras. More importantly, the increasing prices of commodities, and the fight to own them versus rapidly depreciating dollars, will began to place countries in protectionist and war-like stances toward each other, as countries all across the world begin to suffer stagflation.

I believe Bernanke will respond to simultaneously increasing asset-and-discretionary-goods-deflation and consumer-staples-inflation with more monetary stimulus, as his entire career has been predicated on his supposed understanding of how to avoid another Great Depression: Inflate, Inflate, Inflate.

Eventually, when the U.S. is completely and totally exhausted financially, inflation has become structural, and, consumers can barely afford even consumer staples because of their inflated prices, the smart money aka MCFCs (Money Creation and Flow Controllers), will make the markets move in a manner that forces the Bernanke Fed to raise rates, the economy will collapse, and we will go to war to pull out of the depression.

The reason I believe events will occur in this manner is:

a. The MCFCs found it necessary to force the U.S. to reduce its massive consumption of the world's resources (5% population, 20% world resource consumption) in order to clear the path for the creation of a somewhat fascist green world economy, and those MCFCs, plus their brain trusts, have cleverly and surreptitiously created this outcome by bankrupting the country.

b. Quite naturally, no country that was consuming the world's resources as freely as the U.S. was, due to dollar hegemony and its military machine, will simply slide into a subservient position on the world stage without a fight, so the MCFCs and their intelligence resources will instigate a war they can control, with the U.S. as aggressor. This war should ideally be designed to destroy a good portion of the world's basic consumables in order to drive up their prices (just as the ethanol production meme is doing right now with corn prices, even though it's quite obvious the EROEI of producing ethanol using corn is very low to negative; therefore, on a mass scale, corn-based ethanol is an inadequate fuel source or substitution; however, using corn so inefficiently is a very efficient and clever way to drive up food prices), as such action would be necessary to kill off a portion of the world's population via famine, and begin a series of rolling famines. The world population is simply too large to support the creation and maintenance of a semi-totalitarian green economy that will be acceptable on a mass scale; the easiest way to solve this problem is to reduce the population through controllable wars, famines, and rolling occurrences of controllable epidemic/pandemic disease. Look for all these controlled events to occur, most likely in that order, as it is most logical, in the near to mid-term future.

It should be obvious, after reading these statements, that 2) is the solution to the question of when the Fed will arrest the dollars fall. I suggest you not believe any of what you have just read, but pay attention to events on the world stage while keeping the information contained in this message in the back of your head as a far out possibility, and see how those events play out. I guarantee they will occur in a manner similar to my prognostications.

p.s.

“The US policy response has reduced the chance of global growth slowing enough to ease the inflation in natural resource prices. A phase of commodity disinflation is what is needed to prevent economic participants from concluding that rising prices are a one way bet. Since the appropriate size of the stimulus cannot be calibrated with any precision, the aggressive reflation runs the risk of providing a monetary accommodation to the inflationary supply shock. Longer term, a more severe contraction in demand is likely to become necessary to re-anchor inflation expectations.
Indeed, in a global economy, where individual central banks' control over inflation is limited, the costs of re-anchoring straying inflation expectations are likely to be punitive. Even if the stimulus proves insufficient, policymakers will still have sent a strong signal in support of existing price levels. This explicit statement of policy priorities is unlikely to be lost on consumers and businesses.”
http://www.ft.com/cms/s/0/4f25cd52-e...nclick_check=1

[Jim Nickerson]

Re: The deflation case: caught, gutted, poached and eaten

I guarantee they will occur in a manner similar to my prognostications.

Whew! Feel better? I hope you do. We don't often get many guarantee's around here. Why should anyone believe you?

[Slimprofits]

Re: The deflation case: caught, gutted, poached and eaten

Inflation’s Last Gasp

By: Rick Ackerman

...Looking on the bright side, albeit superficially, we would hazard a prediction that inflation won’t be much of a problem eight to ten months from now. The bad news is that it will be because deflation has taken its place. We recently had an exchange of e-mails with hardcore inflationist Eric Janszen of iTulip.com who sees this as most unlikely. Eric sees stagflation ahead, but we have already explained why that would be a relative dairy-tale scenario compared with the full-blown wage-price-asset deflation that lies ahead. Another point of disagreement concerns whether commodity prices can continue to rise even if physical demand collapses in a global recession. Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up. Our response is that this commodity inflation is very different from all others before it simply because it has been fueled, not by physical demand, but by torrents of speculative capital fleeing rapidly deflating financial assets. If ever there were a trend that could not continue for long and which is likely to end in a crash, this is it.

Big Fat Raises for Autoworkers?

As for the odds of a wage spiral, it is something we are unable to imagine, even if Eric remains all but certain that economic theory will make it so. If it turns out we are wrong, then a year from now we should see airline employees and autoworkers getting fat raises to help them pay for $6 gasoline and $4 cartons of eggs. But we think Eric’s logic goes off the deep end when it addresses the shortfall of consumer borrowing that has begun to push the country into deep recession. He says the government will take up the slack: “What occurs when the credit markets become dysfunctional and consumers and business reduce borrowing, the government steps in.” Anyone who actually believes that the government will be able to revive this economy by “stepping in” must imagine that the next WPA will have lots of cushy jobs for unemployed bond traders, LBO specialists, arbitrageurs and Ferrari dealers.

Vaporous Assets

Eric makes a further point, that you cannot have commodity price deflation in a depreciating reserve currency. That is of course true by definition, but we believe that long before the dollar depreciates to the point where Americans can no longer afford to import much of anything, its de facto status as the world’s reserve currency would have shifted to another currency, or perhaps even to gold. Eric also likes to define economic inflation and deflation as, respectively, an increase, or a decrease, in the money supply. Fair enough. But as far as we’re concerned, such definitions are utterly useless to anyone who would seek to prepare for the very difficult times that lie ahead. We suggest that you think of deflation as an increase in the real burden of debt, since that is symptomatically how we will experience it until the speculative mania in commodities breaks, ushering in a precipitous deflation globally of assets, wages and prices.

Anyone who sides with Eric and the inflationists implicitly believes not only that those fat raises for airline employees and autoworkers are coming, but that our homes are about to increase in value dramatically. Trust us on this: hyperinflation is not coming, and debtors will not ultimately be bailed out by a depreciating dollar. Vastly more powerful deflationary forces are already well in motion, drawing irresistible power from the implosion of tens of trillions of dollars worth of vaporous financial assets. The impending credit collapse is about to smother the last-gasp inflation that has been pushing commodity markets into a speculative frenzy. If you expect the economy to somehow muddle along, as Eric evidently does, you will be dangerously unprepared for the catastrophe that lies just ahead.

Gasoline and egg prices double by the end of the year and it is deflation? I don't understand how this could make logical sense to anyone.

[touchring]

Re: The deflation case: caught, gutted, poached and eaten

This war should ideally be designed to destroy a good portion of the world's basic consumables in order to drive up their prices (just as the ethanol production meme is doing right now with corn prices, even though it's quite obvious the EROEI of producing ethanol using corn is very low to negative; therefore, on a mass scale, corn-based ethanol is an inadequate fuel source or substitution; however, using corn so inefficiently is a very efficient and clever way to drive up food prices), as such action would be necessary to kill off a portion of the world's population via famine, and begin a series of rolling famines. The world population is simply too large to support the creation and maintenance of a semi-totalitarian green economy that will be acceptable on a mass scale; the easiest way to solve this problem is to reduce the population through controllable wars, famines, and rolling occurrences of controllable epidemic/pandemic disease. Look for all these controlled events to occur, most likely in that order, as it is most logical, in the near to mid-term future.

Wow, another conspiracy theory. :eek:

[DrYB/C]

Re: The deflation case: caught, gutted, poached and eaten

You shouldn’t believe me, Jim; but you should pay attention to the long term economic and stratified social/behavioral implications of facts contained in readily available public sources:

a.

http://www.washingtonpost.com/wp-dyn...l?hpid=topnews

How will this change the price of water over the next 25-30 years, once it becomes a major media meme, and consequently, a public issue?? And how will it affect public sentiment, and thus public behavior, in relation to the purported causes of drinking water contamination?? How will the costs of solving this problem be dispersed?? What’s the relationship between the cost of water and the cost of producing food products??

b. Is this article:

http://www.washingtonpost.com/wp-dyn...030901867.html

related to the previous article?? If so, how (in terms of cost dispersion within and between micro and macro economies, the natural tendency of all living entities toward entropy, and entropy’s relation to finance, economics, and all levels of governance/politics)? Is the information contained within the article more scientific or more propagandistic?? How will the information redefine your behavior in the next 25-30 years, whether by choice or by the force of men and women more powerful than you??

c. How are energy flux, finance, costs, economics, entropy, and all levels of governance/politics interrelated? How does what’s implied, in terms of its effect on the mid-term and long-term behavior among distinct socioeconomic groups, by this article

http://www.bloomberg.com/apps/news?p...bkY&refer=home

relate to information contained in the other two articles? And how does it relate to the aforementioned interrelationships??

As I said in the first sentence, don’t believe me. Do gather information, analyze it to the best of your ability, and come to conclusions. It’s what I do; I just happen to be extremely confident my conclusions are correct. Time will tell.

[DrYB/C]

Re: The deflation case: caught, gutted, poached and eaten

As the future slithers towards us, we will soon find out if it is a coral or a milk snake. I vote coral:

http://www.msnbc.msn.com/id/23552526

[DrYB/C]

Re: The deflation case: caught, gutted, poached and eaten

Would simultaneously increasing asset-and-discretionary-goods-deflation and consumer-staples-inflation, destined to become much worse,

http://www.reuters.com/article/bonds...32645120080308 ,


necessitate the following:

http://online.wsj.com/article/SB120511973377523845.html ??


1. Conspiracy or

2. Outed-but-once-secretive and illegal activity by government agents of very smart and extremely wealthy men who want to ensure order, and thus control of their wealth, is maintained in a collapsing economy??

Wait…1 and 2 are the same thing, aren’t they??