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

[bart]

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

Obviously if the Fed raises rates, PMs will fall.

Perhaps a quibble, but I'd rather see that stated as "if the Fed raises rates so that they start to go truly towards the positive on a net basis".

[Guest]

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

Bill - in amongst the fear each one of us now probably feels for our personal outcomes in the next decade, we occasionally also can feel a pang of sadness for what our country is turning into. This article about the US going hat in hand to Moscow to cringe for additional funds certainly qualifies in that category for Americans.

[Charles Mackay]

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

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.

Finally had time to run the chart. The Green line is 30yr interest rates and the blue line is the POG. For the entire 13 year bull market it's about as tight as a correlation as you're going to get in markets. The inverse correlation that we've been getting since 2001 is a, cough cough, ... conundrum.

Or is it? During the great depression we also had falling interest rates and rising POG!

[GRG55]

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

Finally had time to run the chart. The Green line is 30yr interest rates and the blue line is the POG. For the entire 13 year bull market it's about as tight as a correlation as you're going to get in markets. The inverse correlation that we've been getting since 2001 is a, cough cough, ... conundrum.

Or is it? During the great depression we also had falling interest rates and rising POG!

Is it really a conundrum? Or is it that the real rate of interest is more important to the price behaviour of gold than the nominal rate?

[Charles Mackay]

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

Is it really a conundrum? Or is it that the real rate of interest is more important to the price behaviour of gold than the nominal rate?

Good point GRG55, they were certainly negative in the 70's as they are now but in the great depression when Homestake mining was quintupling while rates were going down I'm pretty sure real rates were positive. Default was the issue then.

[Jim Nickerson]

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

Is it really a conundrum? Or is it that the real rate of interest is more important to the price behaviour of gold than the nominal rate?

I should have posted a nice graph I saw a few days back (forget where) that showed the best gains for gold are when real interest rates are negative.

[FRED]

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

I should have posted a nice graph I saw a few days back (forget where) that showed the best gains for gold are when real interest rates are negative.

You may have seen it on this web site called "iTulip.com" in a graph included in an old article called "Idiot's guide to investing in gold."

[Jim Nickerson]

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

You may have seen it on this web site called "iTulip.com" in a graph included in an old article called "Idiot's guide to investing in gold."

That wasn't it, FRED, it was a simpler graph that required almost no thinking to grasp its point--right down my line so to speak.

[Jim Nickerson]

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

You may have seen it on this web site called "iTulip.com" in a graph included in an old article called "Idiot's guide to investing in gold."

That wasn't it, FRED, it was a simpler graph that required almost no thinking to grasp its point--right down my line so to speak. Your's does make the same point but not as simply. I'll look again for it.

[Jim Nickerson]

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

What is missing from your chart, FRED, is the price action of gold.

[FRED]

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

What is missing from your chart, FRED, is the price action of gold.

Telling iTulipers that an environment of sustained negative real interest rates is ripe for gold investing is like telling followers of Copernicus that the earth is not the center of the universe.

Not unique to iTulip, however. Zeal's charts are decent.

[afishmcvay]

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

Okay, I'll admit it. I don't understand the whole debate at all. All it leads to is questions in my mind like this:

Why does the entire economy inflationary or deflationary? Why is it important to be in 100% in one camp or the other? I see elements of both happening right now from what I've read.

Some other questions: I definitely get how fractional reserve lending increases the immediate money supply. However, I don't see any discussions on the impact of interest in all of that. After all, when you lend $100, you don't expect to get $100 back. You want $110 back or, if you are a credit card company, $124 plus fees. ;)

It seems like repaid interest money would lessen the payor's ability to spend money "real" things. My sense is that interest (or at least too much of it) puts downward pressure on prices (especially discretionary items) in the long term.

Also, how would paying back a loan be 100% deflationary? In theory, the reserves of the bank have just increased. Couldn't they lend it out again at the rate of their reserves? Doesn't the payor now have more money buy stuff?

If default isn't deflation, then why would the Feds express worry about it in their actions to inflate the dollar?

Also, I'm not sure that I buy (tee-hee) that all money created stays in the system forever. Created money can be mal-invested and therefore it is lost: buildings rot, or are bulldozed, crops misplanted, raw materials shipped 1/2 around the world, assembled, and thrown away in dumpster without use are examples of destroyed money. (Or at least to me. ;))

I guess the debates are lost on me. What I see two or three (or more) very intelligent men, whose actual advice and worries about the economy appear to be very similar, all talking to each other in semantic circles. The picture painted by all of you isn't pretty or going to be solved anytime soon. :mad:

[c1ue]

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

The difference is this:

Deflation = Great Depression.

No jobs, but everything gets cheaper for those with existing cash.

Inflation = Weimar Republic.

Everyone gets screwed - with or without cash - and then Hitler comes.

So you see, it does matter.

[jk]

The difference is this:

Deflation = Great Depression.

No jobs, but everything gets cheaper for those with existing cash.

Inflation = Weimar Republic.

Everyone gets screwed - with or without cash - and then Hitler comes.

So you see, it does matter.

disjointed 'flation = disparate sectors of the economy asynchronously blowing up and collapsing. disjointed 'flation is of questionable stability, with the possibility of devolving into either a pan-inflationary or a pan-deflationary scenario. disjointed 'flation may also show a predominance of either inflationary or deflationary symptoms, without fully devolving into either extreme scenario. thus, the debates.

a key to examining this model is understanding the role of the financial system - the f.i.r.e. economy. the ongoing collapse of fire institutions raises questions about the mechanisms by which money will enter the real, production-consumption economy. see bill gross' recent piece at http://www.pimco.com/LeftNav/Feature...+July+2008.htm for his analysis, consistent with itulip analysis, that the mechanism must be federal spending.


edit: how does disjointed flation differ from a normal economy? after all, in any normal economy there will be some sectors growing and some declining. i suppose the difference is one of degree: the extreme nature of both the expansions in some sectors [e.g. tmt in the '90's, housing in the '00's], and the collapse in others [tmt in the early '00's, housing and housing-finance now].

[Guest]

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

Inflation blah-blah-blah, deflation blah-blah-blah, FIRE econ this that or the other blah-blah-blah, unsustainable debt blah-blah-blah, unsustainable US consumer vendor financing blah-blah-blah, unsustainable bubble in commodities blah-blah-blah, peak money blah-blah-blah, US dollar as global locomotive of inflation blah-blah-blah, 30 years of latent inflation coming home to roost blah-blah-blah, gold bubble blah-blah-blah, spectre of 1929 blah-blah-blah, soaring USD while all the inflation hedgers get taken to the woodshed for their stupidity and greed blah-blah-blah, contrarian this that and the other blah-blah-blah, contra-contrarian this that and the other blah-blah-blah, DOW theory non-confirmation thingys blah-blah-blah, Hindenburg omens blah-blah-blah, technical analysis portends this that or the other blah-blah-blah, folly of goldbugs blah-blah-blah, faith in productive assets that carry a yield blah-blah-blah, collapsing "energy footprints" blah-blah-blah, collapsing "money velocity" blah-blah-blah, collapsing banks portends deflation blah-blah-blah, collapsing banks portends inflation blah-blah-blah, economic collapse leading to wars blah-blah-blah, creeping US fascism due to bankruptcy blah-blah-blah, Michael Hudson says blah-blah-blah, Misesian theory says blah-blah-blah, Schumpeter says blah-blah-blah, Simon says blah-blah-blah, Gott im Himmel says blah-blah-blah, the impossibility of inflation due to static wages blah-blah-blah, the collapse of "third world" growth due to US economic implosion blah-blah-blah, central banks "invent" a new senior currency and so render "goldbugs" foolish blah-blah-blah, the general stupidity and naivete' of "goldbugs" blah-blah-blah, the financial origin of all commodity booms blah-blah-blah, the plummeting cost of manicures is intensely deflationary blah-blah-blah, China's manifest inflation vs. US manifest deflation is a supremely rational construct blah-blah-blah, China's GDP to collapse post-Olympics blah-blah-blah, Obama will do this that and the other, thus causing this that and the other blah-blah-blah, McCain will do this that and the other thus causing this that and the other blah-blah-blah, Israel will bomb Iran causing a massive deflation blah-blah-blah, America will bomb Iran thus causing a massive deflation blah-blah-blah, Iran will bomb the Republic of Sao Tome and Principe, thus causing massive deflation and another string of Hindenburg omens blah-blah-blah, Peace will break out thus causing the price of oil to collapse blah-blah-blah, the Bush administration will finally go away thus causing Peace to break out which will remove the "fear premium" in commodities and be intensely deflationary blah-blah-blah, the USD collapse will usher in an era of Peace through equality of nations blah-blah-blah, the plummeting price of Condos is intensely deflationary blah-blah-blah, an outbreak of SARS will be the trigger ushering in global deflation blah-blah-blah, an outbreak of blather will be the trigger ushering in a global deflation blah-blah-blah, the soaring price of a loaf of bread will trigger revolutionary outbreaks of brilliance among deflationista financial analysts blah-blah-blah ...

Meanwhile ... in the rest of the world, the earnestly conducted, blow by blow, North American INFLATION / DEFLATION debate is summarily ignored. Instead, they are merely struggling to cope with this : ...

_______________

Global Inflation Turmoil Watch:

July 7 - The Wall Street Journal (Roger Bate): "Amid Zimbabwe's political violence is an economic lesson for anyone who doesn't keep an eye on inflation... With food aid only trickling back into the country and hundreds of thousands without enough cash to buy food, it was clear during a trip there last month that the crisis is deepening. Consumer prices have more than doubled every month this year, in some cases doubling every week. A conservative estimate provided by Robertson Economic Information Services, a Southern African consultancy, says that prices are now three billion fold greater than seven years ago...

The exchange rate is currently an astronomical 90 billion Zimbabwe dollars to one U.S. dollar... Buying anything is a 'bizarre experience,' said Lucy Chimtengwende from Bulawayo, who spent $12 U.S. on lunch recently, with the bill in local currency being an astonishing 1.1 trillion Zimbabwe dollars. The menu had no prices on it, she told me by phone, prices are quoted to you and are constantly changing. And if you want to pay by check, good luck. Most proprietors don't accept them, and for those that do, the price is double, given the time it takes the vendor to receive payment."

July 8 - AFP: "Soaring food and fuel prices could spark widespread political unrest, Malaysia's Prime Minister Abdullah Ahmad Badawi said... Abdullah said the inflation crisis has erupted as a global recession looms, spelling trouble for the D8 group meeting in Malaysia. The countries represented at the forum were Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan and Turkey. Abdullah also called on member nations to boost food production to avert conflict. 'The price of oil has skyrocketed to levels never anticipated... The price of food has increased beyond the normal abilities to pay by the poor, which form the majority of the world's people... There is also the danger of the food crisis creating political unrest in many societies.'"

July 7 - Associated Press: "Saudi Arabia: Sultan al-Mazeen recently stopped at a gas station to fill up his SUV, paying 45 cents a gallon -- a price Americans could only dream of as they pay nearly 10 times that at the pump. But cheap gas and the record wealth pouring into Saudi Arabia's coffers from high oil prices are little relief for al-Mazeen. The 36-year-old Saudi technician and many other Saudis say they're only feeling poorer amid the oil boom because of inflation that has hit 30-year highs in the kingdom. 'I tell the Americans, don't feel envious because gas is cheaper here,' said al-Mazeen. 'We're worse off than before.'"

July 9 - Bloomberg (Janice Kew): "Higher fuel costs may make taxi fares unaffordable for poorer South Africans, threatening jobs, Business Report said, citing Carel van Aardt, a research professor at University of South Africa... About 60% of commuters in South Africa use minibus taxis and most users earn 700 rand ($91) to 4,000 rand a month..."

July 9 - Bloomberg (Radoslav Tomek): "The Slovak government is ready to regulate prices after the eastern European nation switches to the euro to prevent 'speculative' increases that would accelerate inflation, Economy Minister Lubomir Jahnatek said. The government approved establishing a so-called Price Council which will monitor consumer prices throughout 2009.

The council will have powers to ask the government to regulate prices of particular goods or services, should it discover any ``anomalies' in their development, according to a document of the proposal discussed by the Cabinet today."

July 11 - Bloomberg (Khalid Qayum): "Pakistan's inflation accelerated to a 30-year high in June... Consumer prices in South Asia's second-largest economy jumped 21.53% from a year earlier..."

July 9 - Bloomberg (Abeer Allam and Abdel Latif Wahba): "Egyptian inflation accelerated to an average 11.7% in the fiscal year that ended June 30..."
July 7 - Bloomberg (Daryna Krasnolutska and Halia Pavliva): "Ukraine's inflation, the fastest in Europe... fell to 29.3% in June from 31.1% in May, which was the highest in Europe..."

July 9 - Bloomberg (Milda Seputyte): "Lithuanian inflation accelerated in June to the fastest pace in more than 11 years... The inflation rate rose to 12.5%, the third-highest in the EU, from 12 percent in May..."

July 7 - Bloomberg (Ott Ummelas): "Estonian inflation accelerated in June, returning to the fastest pace in 10 years, as energy and accommodation costs jumped. The rate increased to 11.4%..."

July 9 - AFP: "Inflation in some emerging countries in Latin America and Africa 'is getting out of control,' International Monetary Fund head Dominique Strauss-Kahn said..."

Currency Watch:

July 9 - Bloomberg (David M. Levitt): "New York's Chrysler Building, once the world's tallest skyscraper, was acquired yesterday by the Abu Dhabi Investment Council, a Middle Eastern sovereign wealth fund, for an undisclosed price."

The dollar index declined 0.9% to 72.1. For the week on the upside, the South Korean won increased 3.8%, the Euro 1.3%, the Danish krone 1.3%, the South African rand 1.3%, the Swiss franc 1.1%, and the Australian dollar 1.0%. On the downside, the Taiwanese dollar and the Brazilian real both declined 0.1%.

Commodities Watch:

July 7 - Bloomberg (Chanyaporn Chanjaroen): "Aluminum rose to a record in London as a power shortage forced smelters in the north of China, the world's largest producer of the metal, to reduce output."

Gold rose 3.3% to $964 and Silver 2.4% to $18.82. August Crude added 40 cents to $144.52. August Gasoline declined 0.6% (up 43% y-t-d), while August Natural Gas sank 12.9% (up 58% y-t-d). September Copper dropped 5.3%. September Wheat dropped 6.2% and August Corn sank 8.8%. The CRB index declined 2.3% (up 28.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 1.2% (up 44% y-t-d and 73% y-o-y).

China Watch:

July 7 - Wall Street Journal Asia (Lawrence J. Brainard): "It's becoming ever clearer that China's inflation problem is a monetary phenomenon after all, and not just a temporary spike in the prices of a couple food staples. But consensus on how to solve that monetary problem is still elusive. Beijing's adoption last week of administrative measures to combat speculative 'hot money' inflows shows policy makers still believe... that tightening regulation alone can do the trick.

That may prove a costly mistake. Consider the scale of the problem facing policy makers. Headline consumer price inflation has clocked in at or above 7.1% every month this year. Supply shocks for foods like pork play a role, but the fundamental problem is too much money pouring into the economy, chasing too few assets. One indicator of this is that China has recently been accumulating foreign assets at the astonishing rate of $75 billion a month."

July 8 - Bloomberg (Tian Ying): "China's car sales rose 17% in the first half as economic growth spurred demand in the world's fastest growing major vehicle market. Automakers sold a total of 3.61 million cars, sport-utility vehicles and multipurpose vehicles..."

July 11 - Bloomberg (Li Yanping and Nipa Piboontanasawat): "Foreign direct investment in China rose 45.6% in the first half from a year earlier, swelling inflows of cash that may stoke inflation in the world's fastest-growing major economy. Spending by overseas companies increased to $52.4 billion..."

Japan Watch:

July 10 - Bloomberg (Mayumi Otsuma): "Japan's wholesale inflation rate rose to a 27-year high in June as companies raised prices to counter record oil and commodity costs. Producer prices climbed 5.6% from a year earlier, after a revised 4.8% gain in May..."

July 11 - Bloomberg (Toru Fujioka): "Japanese consumers became the most pessimistic they've been in at least 26 years as higher gasoline prices and food costs eroded their spending power."

India Watch:

July 11 - Bloomberg (Kartik Goyal): "India's inflation accelerated to the fastest pace since 1995... Wholesale prices rose 11.89% in the week to June 28..."

July 11 - Bloomberg (Cherian Thomas and Kartik Goyal): "India's industrial production grew at the slowest pace in more than six years and Standard & Poor's said it may cut the nation's credit rating to junk if the economy deteriorates further... Bonds dropped after S&P said its BBB- ranking on India's long-term local currency debt may be lowered to 'speculative grade.' 'A rating downgrade would be a blow to India,' said Ramya Suryanarayanan, an economist at DBS Bank Ltd... 'Heading in that direction isn't good as investors are already panicking about inflation, growth and fiscal prospects.'"

Asia Bubble Watch:

July 9 - Bloomberg (Seyoon Kim): "South Korea's retail sales rose 10.2% in May as consumers paid more for gasoline and bought more cars and computers."

July 7 - Bloomberg (James Peng): "Taiwan's export growth unexpectedly accelerated in June on demand from China, Europe and Japan. Overseas shipments rose 21.3% from a year earlier after increasing 20.5% in May..."

July 9 - Bloomberg (Soraya Permatasari): "Malaysia's central bank said inflation probably exceeded 6% in June, higher than earlier estimated and bolstering expectations it will raise interest rates as early as this month."

July 8 - Bloomberg (Kyung Bok Cho): "Asian companies outside Japan will face a 'perfect storm' of rising commodities costs and slowing growth in export volumes, triggering earnings-estimate downgrades by analysts, Citigroup Inc. said. Materials and industrials stocks... have 'lofty' valuations and should be avoided..."

July 8 - Bloomberg (Naila Firdausi): "Indonesia's consumer confidence index dropped to a record low in June after the government increased fuel prices a month earlier and on concern that food costs will continue rising, a research body said."

July 8 - Bloomberg (Woro Widya Utami and Berni Moestafa): "Indonesia may have to spend as much as 300 trillion rupiah ($33 billion) to cap fuel prices next year as oil surges, Finance Minister Sri Mulyani Indrawati said."

Latin America Watch:

July 9 - Bloomberg (Jens Erik Gould): "Mexican inflation accelerated to the fastest in almost four years last month on higher costs for food and housing... Consumer prices climbed 5.26% in June from a year earlier..."

July 8 - Bloomberg (Daniel Cancel and Matthew Walter): "Venezuelan annual consumer prices in June rose the most since 2003 as the easing of price caps on foods caused supermarket prices to surge. Consumer prices rose 32.2% in June from a year earlier..."

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