can a dollar crisis be deflationary?

[jk]

the dollar

great post, jim.

on the dollar, i've seen the chart parsed in 2 ways at james turk's website:
http://goldmoney.com/en/commentary/2006-06-11.html

one way, which you've shown is:





alternately, there's:









swendlin's charts were done 5/5, turk's 6/11. on 6/11 the dollar index was 85.31. now it's 86.45 and i think it's still in doubt which view will prevail. if rates continue to rise as you [and kaufman] predict, then we may see a test of the "neckline" all the way up at 92. should we get there, that will be one hairy moment! imagine the conditions that would bring us there: i think it would represent a continued flight to [perceived] safety in the dollar, and a corresponding continued crash of global equities, commodities and bonds. how's this for a theory: that would be the moment the fed starts to ease again and gold goes to the moon.

[IMG]file:///C:/DOCUME%7E1/jeff/LOCALS%7E1/Temp/moz-screenshot.jpg[/IMG][IMG]file:///C:/DOCUME%7E1/jeff/LOCALS%7E1/Temp/moz-screenshot-1.jpg[/IMG]

[jk]

timing: savings, interest rates and the dollar

i don't see why an increase in savings would strengthen the dollar. an increase in savings would slow consumption, including consumption of imported goods. but it would slow the economy in general and lower interest rates, making the dollar less attractive.

rereading jim's post and the one of mine he quoted [above], i realize that we have a tremendous difficulty, and lack of clarity, with timing. for example, re this issue of savings rates and the dollar, i start the quote above with an assumed increase in savings. such an increase in savings and decrease in consumption would occur in an environment of financial stingency, probably in the context of still higher interest rates, as henry kaufman predicts. these same higher interest rates would be supporting and strengthening the dollar. the economic slowdown or recession flowing from these conditions would lead to lower rates and a fall in the dollar.

one thing in the notion of "ka=poom" is that it describes an INITIAL REACTION to some set of conditions, here "ka," and then a COUNTER REACTION, "poom." in these discussions it would be worth our whiles to try to analyze and be explicit about what is an intial reaction and what is a later counter-reaction.

[Jim Nickerson]

Partial quote of jk:

one thing in the notion of "ka=poom" is that it describes an INITIAL REACTION to some set of conditions, here "ka," and then a COUNTER REACTION, "poom." in these discussions it would be worth our whiles to try to analyze and be explicit about what is an intial reaction and what is a later counter-reaction.

First, let me correct an error (at least the one I see) in my post #15 above. After referencing EJ's revised Ka-Poom Theory, I used "Deflation" rather than the appropriate "Disinflation." http://en.wikipedia.org/wiki/Disinflation

It seems clear to me that currently, just 6 weeks after EJ put up his revision, that we are still in the first "Poom." In his theory the "Ka's" are periods of decreasing rates of inflation, ie, disinflation. If it were to turn out there is some reality to his first "Poom" of annual CPI rates reaching something above 12.5%, then we are quite a ways from that.

Specifically to jk, the initial reactions are periods of disinflation and are 'Ka's." The "Poom's" are periods of inflation.

It occurs to me as I write this, that in my mind I have not carefully differentiated the words "disinflation" and "deflation" as I have read them many times in so many places. In our own economy, I ask this question: If one looks at the chart I put up in #15 above, when the PPI (the light green line) dropped below 0% between 10/01 and 10/02, was that a period of deflation?

jk is correct, in that everyone should strive for specificity and precision in the terms we use.

The most confusion about all of these considerations for me are the determination of what measurements to use to note Inflation and Deflation. One one hand, all we get from bls.gov are the "doctored" figures each month for PPI and CPI. Then there is periodic reference to John Williams' Shadow Government Statistics http://www.gillespieresearch.com/cgi...gn/?ref=234993. I have no quarrel with Williams' endeavor to put out truthful data, but from what I can tell the FOMC and the markets do not move based on what John Williams puts out as the real picture concerning inflation.

If one reads about the problems with defining and measuring inflation as I referenced above in #7, Shedlock's conclusion for the best method of describing inflation would be to follow "net expansion of money supply and credit." Now I do not know personally now to track expansion of money supply and credit on any valid basis, though it appears to me something worthwhile to follow. Any precise advice about how to do so is solicited.

I think Shedlock's attention to both money supply and credit availability explains a lot of what went on in Japan from 1989 until recently. I certainly am not in any position to seriously doubt Henry Kaufman, but if he says it is still easy to get credit in the US, then until someone counters that with cogent data, I'll accept Kaufman's contention. If Kaufman were to be correct, and if Shedlock's conclusion about best descibing "inflation" is correct, then we are in a period of inflation--first occurring "Poom" in EJ's theory.

[jk]

tracking credit

the best place that i know of to get overwhelmed with information on this subject is doug noland's weekly credit bubble bulletin over at prudentbear.com. every week he goes through reams of information and anecdotes which make it clear that, yes, credit is still expanding enormously. the rate of expansion might be slowing a bit, and that relative slowing has been enough to cause the recent fall in asset prices. imagine if credit were to actually contract!

[Jim Nickerson]

great post, jim.

on the dollar, i've seen the chart parsed in 2 ways at james turk's website:
http://goldmoney.com/en/commentary/2006-06-11.html

one way, which you've shown is:





alternately, there's:









swendlin's charts were done 5/5, turk's 6/11. on 6/11 the dollar index was 85.31. now it's 86.45 and i think it's still in doubt which view will prevail. if rates continue to rise as you [and kaufman] predict, then we may see a test of the "neckline" all the way up at 92. should we get there, that will be one hairy moment! imagine the conditions that would bring us there: i think it would represent a continued flight to [perceived] safety in the dollar, and a corresponding continued crash of global equities, commodities and bonds. how's this for a theory: that would be the moment the fed starts to ease again and gold goes to the moon.

[IMG]file:///C:/DOCUME%7E1/jeff/LOCALS%7E1/Temp/moz-screenshot.jpg[/IMG][IMG]file:///C:/DOCUME%7E1/jeff/LOCALS%7E1/Temp/moz-screenshot-1.jpg[/IMG]

I don't know what comes first, the chicken or the egg. To reference the chart I put in #15 again, the markets as indicated by the S&P 500 (dark blue line) went up from 1997-2000 as did inflation using the government's figures. On that same chart inflation is currently going up, though there has been over 34 days now about a -7.75% loss from high--which is not severe. If the FOMC is serious as Benanke presumably is about inflation fighting then more interest rates are coming, and if interest rate rises are supporting the UD$'s present rise, until there are signs inflation is ebbing, then why should the UD$ not continue up? Were the US$ Index get to 92 that is about 6% higher than US$ Index close Friday at 86.88. For whatever are all the reasons the $ is up, and to me its chart looks good, if it gets to 92, then the circumstances that exist then will determine what is next. Gold indexes XAU and HUI also look positive to me, and I cannot say that the CRB is not about to bounce. (I look at these charts at stockcharts.com if anyone wishes to look at them).

jk, you may be correct totally or in part, that money that has been in the emerging markets is seeking safety in the $ for the moment, and perhaps in gold too.

[jk]

the dollar

jim, the egg came first. [fish, amphibia and reptiles were laying eggs long before there were chickens.]

markets, unfortunately, are not as easy to analyze. on the one hand you have evidence of softening economy, and especially a softening housing market. on the other hand you have increasing evidence of commodity inflation feeding through so strongly that it actually shows even after all the bls manipulations of the statistics. on the third hand you have a new fed chief being challanged to show his mettle.

bill fleckenstein, longtime bear and hedge fund mgr, says "one and done" -- that is, the fed raises 25bp but announces its intention to then pause. the markets have been toying with the possibility of a 50bp hike, but that seems unlikely. and you have henry kaufman's position of several hikes to go.

given the "transparent" and "measured" approach of the fed, i guess i could picture a remake of the 70's stagflation. the fed raises rates but credit keeps expanding. the fed keeps raising but is afraid to kill the economy. so it stays behind the inflation curve, which leads to more raises, but always too little too late.

if the fed pauses soon i'd expect a failing rally in equities, a large rally in gold, a drop in the dollar and likely a sell-off in bonds. in the stagflation scenario the fed doesn't pause for a long, long time. and the dollar could strengthen.

i've got to take a break from this stuff. i can talk myself into about any outcome you care to mention, and my brain is turning to mush.

[Jim Nickerson]

jim, the egg came first. [fish, amphibia and reptiles were laying eggs long before there were chickens.]

i've got to take a break from this stuff. i can talk myself into about any outcome you care to mention, and my brain is turning to mush.

I no doubt knew once that eggs came before chickens, but then there is the joke about the rooster on a bed with an egg, and the rooster is smoking a cigarette. Now, which came first?

Your brain is good and your abilities to conjure scenarios far exceeds mine. You put forth a lot to contemplate. I too am tired, everytime I look around you have posted another note. Take a break, read a journal.

[fogger]

Backing up...

The argument always leads in circles doesn't it? What was that theory from 1940s computer science? "You can't solve a problem using the same tools used to define it."? Or something like that. So let's back up to the definitional problems.


Government and the Fed have done an excellent job of making "inflation" a synonym for "rising prices" and further, that "inflation" is a synonym for a rising CPI.

But, as stated above, the true definition of inflation is "an increase in the money supply that results in rising prices". Of course price rises can occur for many reasons (such as supply/demand imbalances), but in the public's mind all price rises are simply termed "inflation".

This obfuscation of cause and effect allows the Fed to more easily control inflation perceptions. They can now show that inflation is contained by manipulating the metrics such as CPI or mis-directing the cause of "inflation" to "greedy oil companies". The effect has now become the cause.

This is done to hide the true cause of inflation: The Fed and government are continually spending new money into the supply. Targeted at a benign 2% so we don't start asking too many questions.


jk is absolutely correct. In our banking system a flat money supply growth has the effect of deflation. This system requires constant money supply expansion to keep afloat. Even a temporary pause in the expansion can have devastating effects.


So it's obvious the Fed's statements are for public consumption and have nothing to do with their true goals. They are managing perception. They are acting with a separate intention. Once that is understood, analysis becomes much simpler.