You're not going to believe this: Inflation/deflation debate still alive?

[FRED]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Aaron Krowne in fine form over at the Mortgage Lender Implode-O-Meter this week, chiming in and reiterating much of the iTulip theme on the inflation / deflation debate (whether he acknowledges it or not, he's "one of ours" now -and getting bleaker, too.):
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To illustrate I'd like to ask my friend Mike "Mish" Shedlock, who asserts that "we are in deflation," what he does when he pulls up to the gas station pump. Does he say "we are in deflation now -- just look how home prices are down about 20% from their mid-2006 peak. Therefore I demand you only charge me 80% of mid-2006 ($2.50/gallon) gas prices. So here is $2.00 for a gallon?" I don't think so. He probably intuitively senses that that wouldn't go over very well.
The basic reason this sort of Austrian "instant money quantity" reading is wrong is that plenty of money has already been created over the past 30 years, so there is really no need to "print" any more right now to get most of the bad effects!
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So here you have deflationary causes producing dramatically inflationary effects. Seems counter-intuitive, but this is really nothing new: it is historically called the "flight to real goods", and it happens in every hyperinflation, ALONG WITH financial market collapse.

I believe what we are seeing here in oil, and to a great extent in most other basic commodities, is the FIRST EVER GLOBAL HYPERINFLATION. This is happening historically now and in such a big way because the dollar is the de facto reserve currency -- and the first-ever fiat global reserve currency -- so the Fed's actions are magnified beyond anything that has ever been seen before. They are also eclipsing the effect of the rest of the G7, which can't seem to decide if they will exercise restraint or provide cover for the Fed. They are basically puppets of the Fed (or have been -- there are signs of rebellion, especially from the ECB. I would say this rebellion is inevitable, and it will spread).

But interest rates in the West, if they do start going up by way of policy, probably will not go up fast enough to match the inflation they have already unleashed. And as long as the interest rates remain NEGATIVE in real terms (irrespective of manipulated CPI statistics), the problem will get worse. Hence the "hyper": continued negative real rates alongside collapsing paper money markets (along with supply and demand fundamentals) will keep the tailwinds on prices for essential commodities. Where else is the money going to go?
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So I hope with the above I have convinced you at least that something new and hyperinflationary in nature is going on with oil prices. If by some miracle prices were to correct back to $100, not only would it likely be temporary, but extreme inflation would probably show up in some other commodity, or even (God forbid) precious metals. The need to preserve these trillions of wealth from ailing areas of the financial economy is not going away any time soon. It is going to get worse. In fact, if the authorities had any brains, they'd encourage investment in precious metals to divert immense pressure from food and energy. No one ever starved from gold skyrocketing in price; though it did end a political regime or two.
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It is now getting so bad that the state and local governments are starting to appeal to the Federal government for help: major city mayors recently went to congress to testify about their infrastructure and financial crises (the two are really the same problem) and beg for help. The latest housing bailout bill proposes billions to allow states to buy up foreclosed properties. And this is likely just the beginning.

But the problem is: the Federal government doesn't have any money. It's already deeply in the red, as we just discussed. They can only provide money if they can borrow it, which is bound to reach its limits soon. Where no limits are obeyed, there will be much more inflation, much faster. Any borrowing the Federal government can do above and beyond the states is really only backed by inflation (the ability to print more money to pay off the debt), but the world is beginning to question why bonds backed by little more than inflation should really be considered 'AAA'. That system didn't work so well in the US mortgage market.
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My big worry at this point is that the US economy, for lack of a more euphonious wording, is headed for complete collapse due to failure of infrastructure as the coup de grace of financial stress. Now we will see how critical that mundane thing, so taken for granted, is to even have an economy in the first place. And of course, you can add lack of manufacturing capacity to our the list of infrastructure problems.

Previously I thought "severe recession", and then "depression" to describe what we face, but neither now seems to do the situation justice. An aspect of the trouble now beginning to figure prominently is the failure of American cities to function as laid out in their current form... because of the new factor of people simply not being able to afford to drive their cars (especially from home to work). Kunstler has been writing about this for years. In return he was considered a carnival side show; a sort of amusing angry little man off in his own little world. But now it looks like he was right.

A. Krowne.

What I want to make sure I get across here, in case it's not obvious, is that I'm fairly certain that an unseemly economic turn of events is more likely to happen than not, probably in the next three years, and it's going to happen here, in the U.S. To us. To you and me. While it's likely to be worse than most of us are prepared for—that is, it will not be your average recession—it will not be the end of the world either, although there may be times when things look that way. It will certainly be the end of living high off the hog on other people's savings, and it will represent a transformation that we must go through to get to a different place.

Whether you experience the new place as better or not is going to depend on where you started and what's important to you. While periods of economic readjustment are never painless, it's important to keep in mind that the challenges we face as individuals represent nothing worse than those that 90% of the world's citizens cope with every day with grace, dignity, and humor. No one owes us a high standard of living, and most of the world gets by without one. Our main challenge will be to accept and deal with our problems effectively in the short term. It will require strong, honest leadership. In the long term, we can count on the United States' and its people's extraordinary ability to adapt to change and come out ahead.

- Eric Janszen, Inflation is Dead! Long Live Inflation! (Dec. 2005)

[c1ue]

Re: You're not going to believe this: Inflation/deflation debate still alive?

2006 standards of living:

United States:
44970

Poland:
8190

http://www.finfacts.ie/biz10/globalw...epercapita.htm

Euro/Dollar in 2006: about .77

2013 standards of living (in 2006 dollars) (growth rates net of inflation)

Scenario 1:

United States:
31404 (-5%/year for 7 years)

Poland:
19306 (+6%/year for 7 years) (Euro/dollar = .5)

Scenario 2:

United States:
22485 (100% inflation from 2008 to 2013, 0% net growth in 2007 & 2008)

Poland:
19306 (+6%/year for 7 years) (Euro/dollar = .5)

Still think the US winding up with a standard of living comparable to Poland is out of the question?

More importantly, do you now comprehend how inflation and/or dollar depreciation can rob you?

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

and yet another comment on the spat:

ECB Is From Mars, Fed Is From Venus, Deutsche Bank Says: Chart of the Day The European Central Bank and the Federal Reserve are reacting differently to the threat of faster inflation, with policy makers in Europe likely to backtrack after raising interest rates, according to Deutsche Bank AG economists.

[raja]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Obviously if the Fed raises rates, PMs will fall. Are deflationistas seriously expecting the Fed to commit fast political suicide by hiking rates during a credit crunch when it can die by slow, politically more expedient inflationary suicide instead?

That is the essence of Ka-Poom Theory, that governments always prefer slow suicide with the potential for recovery within the term of the current administration over the fast suicide with no chance of recovery.

I am a bit confused here . . . .

The way I understand it is that the US finances spending in large part by selling Treasuries. If the interest rates paid on Treasuries are not high compared to other investments, the government will have in increase those rates to induce buyers to invest.

So, it seems to me that, as inflation goes up, the rates on Treasury bill MUST rise.

If I've got that right, then it seems that as soon as inflation starts up in earnest, gold will have to go down (given that there is a time lag due to flight-to-safety buying).

So, perhaps you see how I'm confused . . . .
Inflation up, Treasury rates up, gold down.
Or perhaps the rates you mentioned above are not Treasury rates ???? :confused:

[bart]

Re: You're not going to believe this: Inflation/deflation debate still alive?

From another board:

From Jens O. Parsson's "The Dying of Money"

Lessons of the Great German and American Inflations

“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money*, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of al traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”

*emphasis mine

This problem has happened before and will happen again (albeit, in a slightly diferent fashion) and yet again we will see vast inflation while at the same time (as Parsson show in his book) "tightness of money." That "tightness of money" occured during times of much infkation and yet, was not deflationary.

If the economy slows faster, than the supply of money, that's still an inflationary condition. More money chasing less goods.

Parsson's book is a good one.

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

From another board:
Parsson's book is a good one.

And a book that is hard to find! I finally found a copy a few years ago on Puplava's recommendation. One lesson I'll never forget is that the hyperinflation starts from money coming home. People abroad realize what is happening before the citizens of the hyperinflating country do. Bart, what is that latest stat that the government is now hiding? The treasury report that shows money coming home?

[bart]

Re: You're not going to believe this: Inflation/deflation debate still alive?

And a book that is hard to find! I finally found a copy a few years ago on Puplava's recommendation. One lesson I'll never forget is that the hyperinflation starts from money coming home. People abroad realize what is happening before the citizens of the hyperinflating country do. Bart, what is that latest stat that the government is now hiding? The treasury report that shows money coming home?

There's a link in my original post but the book is quite pricey - over $240 used.

The most recent "hidden" stat is on the Fed's weekly public H.4.1 report. The boys have been lending securities in off balance sheet mode for almost 3 months, in the $100-$150 billion range. I'm still looking for an application, the interest rates are around 1-2%.

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

There's a link in my original post but the book is quite pricey - over $240 used.

The most recent "hidden" stat is on the Fed's weekly public H.4.1 report. The boys have been lending securities in off balance sheet mode for almost 3 months, in the $100-$150 billion range. I'm still looking for an application, the interest rates are around 1-2%.

OK, but what about these foreign investment numbers in the U.S. being discontinued?

http://worldnetdaily.com/index.php?f...w&pageId=66694

[Rajiv]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I will get "Dying of Money" from the library and put up the pdf if you are interested in it.

There was a very illuminating articel at Elaine Supkis' site

Martin Jr And The Destruction Of Gold Peg

To be frank, going back into old Fed Reserve speeches, one is struck by both how similar today's problems are to past difficulties as well as how openly earlier Fed chiefs used to try to talk to Congress and the public. People thought Greenspan was very smart and clever because he talked in circles and made little rational sense. This supposedly made his many mysterious policies look difficult and thus, we had to trust him because he knew more than us little people. Well, that was a false front. Today, we go back to when I was born to see what Mc Chesney Martin Jr thought about Fed policies after WWII and during the Korean War. He is the Fed chief who shoved things to the bitter destruction of the gold standard and the devaluing of silver coinage.

First, let us introduce the longest-serving Fed Chief, a man born with a silver spoon in his mouth. The destroyer of the silver/gold basis of our currency was done by the hands of the son of one of the founders of the Federal Reserve at Jekkyl Island, Georgia, in 1913.

William McChesney Martin, Jr.

William McChesney Martin, Jr. (born December 17, 1906, St. Louis, Missouri – died July 28, 1998, Washington, D.C.) was the ninth and longest-serving Chairman of the United States Federal Reserve, serving from April 2, 1951 to January 31, 1970 under five Presidents. William McChesney Martin, Jr. was born to William McChesney Martin and Rebecca Woods. Martin's connection to the Federal Reserve was forged through his family heritage. In 1913, Martin's father was summoned by President Woodrow Wilson and Senator Carter Glass to help design the Federal Reserve Act that would establish the Federal Reserve System on December 23 that same year. His father later served as governor and then president of the Federal Reserve Bank of St. Louis.

Martin was a graduate of Yale University, where his formal education was in English and Latin rather than economics.

Ah, a family affair! The protean forces unleashed by daddy were completed by the son. McChesney Martin Jr. presided over the launching of the Cold War which was a perpetual war and coming in on the wings of the needs of Truman for waging the wasteful and dangerous Korean War, the need for more and more money on top of the huge debts generated by WWII....Martin Jr. had to fix this so the government could wage war while tricking the populace into thinking there was no wars. Thus, no war taxes, no more rations, no more sacrifices. From the ascension of the son onto the saddle of the War Horse, McChesney Martin Jr. was able to carry out his mission!

[bart]

Re: You're not going to believe this: Inflation/deflation debate still alive?

OK, but what about these foreign investment numbers in the U.S. being discontinued?

http://worldnetdaily.com/index.php?f...w&pageId=66694

... there's always at least one of youyr type in a crowd. :cool:

I was actually the one who referred Jerome Corsi (the author of that article) to John Williams after he interviewed me about my M3 reconstruction (that was published much earlier than John's ;) ).

And on the BEA ceasing publication and that web page recap, I was under the impression that it was still going. I'm also unaware of any other significant data or reports being dropped. Perhaps they've learned a lesson from the public outcry and of course from cantankerous folk like John Williams and others who are now publishing M3.

[bart]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I will get "Dying of Money" from the library and put up the pdf if you are interested in it.

Please do, I'd love to host it on my site and read it (instead of scanning a copy) too. I gather that it's public domain now?

There was a very illuminating article at Elaine Supkis' site

Martin Jr And The Destruction Of Gold Peg

Yes, Martin is definitely one of the "very best people" who actually is very far from it, and not a favorite person of mine.

Martin Armstrong had many "interesting" things to say about him and what he did and did not do in the '20s that helped create the mess and also the Great Depression in his downloadable "The Greatest Bull Market In History".

[bill]

Re: You're not going to believe this: Inflation/deflation debate still alive?

So I hope with the above I have convinced you at least that something new and hyperinflationary in nature is going on with oil prices.
It is now getting so bad that the state and local governments are starting to appeal to the Federal government for help:

Now getting so bad countries ask for help.

http://www.imf.org/external/pubs/ft/...NEW070108A.htm

NEW IMF STUDY
Price Surge Driving Some Countries Close to Tipping Point—IMF

IMF Survey online


July 1, 2008

• Food and oil price surge hurting poorest countries the most
• IMF study shows some countries at a tipping point
• Strauss-Kahn calls for broad cooperative approach

The impact of surging oil and food prices is being felt globally but is most acute for import-dependent poor and middle-income countries confronted by balance of payments problems, higher inflation, and worsening poverty, a new IMF study warns.
Analyzing the macroeconomic policy challenges arising from the price surges, the study argues that many governments will have to adjust policies in response to the price shock while the international community will need to do its share to address this global problem.
In advanced countries higher food and fuel prices are reducing people's living standards and making it more difficult for governments and central banks to support growth while containing inflation.

It also stands ready to help with balance-of-payments support, and has already provided additional financial assistance to seven low-income countries through the concessional Poverty Reduction and Growth Facility. It is also streamlining the Exogenous Shocks Facility to make it more useful to IMF members, and stands ready to provide support for middle-income countries through Stand-By Arrangements.

Now where is that IMF, SWF manager?
found him
http://en.rian.ru/business/20080630/112615283.html

MOSCOW, June 30 (RIA Novosti) - The United States intends to set favorable conditions for investment, including from Russia, the U.S. treasury secretary said Monday in Moscow. At a meeting with the Russian prime minister, Henry Paulson told Vladimir Putin that the U.S. welcomed investment, including from state sources, and would do everything to make sure the investment flows continue.
Paulson said investing in the U.S. should be attractive to Russia's "sovereign fund", but Putin told him Russia does not yet have a sovereign investment fund, although the authorities are ready to consider setting up one.

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I will get "Dying of Money" from the library and put up the pdf if you are interested in it.

Please do, then I won't have to worry so much when I loan people my only copy!!!

[GRG55]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Obviously if the Fed raises rates, PMs will fall. Are deflationistas seriously expecting the Fed to commit fast political suicide by hiking rates during a credit crunch when it can die by slow, politically more expedient inflationary suicide instead?

That is the essence of Ka-Poom Theory, that governments always prefer slow suicide with the potential for recovery within the term of the current administration over the fast suicide with no chance of recovery.

Avoiding sudden death is a time honoured tradition at the Fed; something the deflatinists prefer to overlook apparently...

"Booms, it must be noted, are not stopped until after they have started. And after they have started the action will always look, as it did to the frightened men in the Federal Reserve Board in February 1929, like a decision in favour of immediate as against ultimate death. As we have seen, the immediate death not only has the disadvantage of being immediate but of identifying the executioner."
--John Kenneth Galbraith, "The Great Crash 1929"--

That is why there has never been any serious danger of a Fed rate hike in present circumstances, and little danger of any sustained rate hike from the ECB either. History rhymes...

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Obviously if the Fed raises rates, PMs will fall. Are deflationistas seriously expecting the Fed to commit fast political suicide by hiking rates during a credit crunch when it can die by slow, politically more expedient inflationary suicide instead?

That is the essence of Ka-Poom Theory, that governments always prefer slow suicide with the potential for recovery within the term of the current administration over the fast suicide with no chance of recovery.

jimmy3 and Fred, aren't you both making an assumption that isn't born out in the historical record? Interest rates rose for the entire 13 year gold bull market from 1967 to 1980.