Anybody see global deflation looming here? How about an opinion from all you silent observers?

[Southernguy]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

Sorry, I rarely write because Iīm not so fluent in written English. I see deflation coming as a contradiction between to conflicting events, 1)money creation by central banks in the form of rescue packages, buys of distressed assets, etc. 2)money destruction by cash hoarding by individuals, banks, businessīs, etc.
This two conflicting forces may prevail at one time or another. AS Galbraith once said, banks are the main creators of money,not any more now, theyīre destroying money by the way of reducing credit.
But I think the real origin of this crisis is not monetary. Itīs a long-time running reduction of purchasing power of salaries in the USA, but also in Europe, by the way of the predominance of neoclassical economic policies. That was compensated through massive credit so as to make economic machine humming.
Things are unraveling now.
This shall be a seriour protracted economic crisis, as I also think,intuitevely that China shall suffer a great economic crash.
They have been growing too fast for a too long time, investing over 40% of GDP on new goods manufacturing capacity. At some time they have to experience a classic overproduction crisis. And probably the time has arrived.
I very much appreciate EJīs, and the other fellows analysis, which, by the way have helped me navigate throuh this rough seas.
I,m a real estate investor here in my country in South America, and also a cattle grower, now in process of selling most of my land....
At some time, however, inflation shall prevail, as EJ has pointed out, and then, to bring a new time of economic "order", some Volcker like guy shall appear, reining in all this disorder.
A new multipolar world shall emerge.
Today Argentina and Brazin begun trading between them in local currency. Thatīs an unnobserved move towards the demise of the dollar as universal trading and reserve currency.
Such agreements are going to become more frequent. There is no point in giving the USA for free huge amounts of value as segnoriage and financing their wars and comsumpion excesses.
Have a good time, and thanks a lot for your analysis and insight.
SG

[Southernguy]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

Sorry, I rarely write because Iīm not so fluent in written English. I see deflation coming as a contradiction between to conflicting events, 1)money creation by central banks in the form of rescue packages, buys of distressed assets, etc. 2)money destruction by cash hoarding by individuals, banks, businessīs, etc.
This two conflicting forces may prevail at one time or another. AS Galbraith once said, banks are the main creators of money,not any more now, theyīre destroying money by the way of reducing credit.
But I think the real origin of this crisis is not monetary. Itīs a long-time running reduction of purchasing power of salaries in the USA, but also in Europe, by the way of the predominance of neoclassical economic policies. That was compensated through massive credit so as to make economic machine humming.
Things are unraveling now.
This shall be a seriour protracted economic crisis, as I also think,intuitevely that China shall suffer a great economic crash.
They have been growing too fast for a too long time, investing over 40% of GDP on new goods manufacturing capacity. At some time they have to experience a classic overproduction crisis. And probably the time has arrived.
I very much appreciate EJīs, and the other fellows analysis, which, by the way have helped me navigate throuh this rough seas.
I,m a real estate investor here in my country in South America, and also a cattle grower, now in process of selling most of my land....
At some time, however, inflation shall prevail, as EJ has pointed out, and then, to bring a new time of economic "order", some Volcker like guy shall appear, reining in all this disorder.
A new multipolar world shall emerge.
Today Argentina and Brazin begun trading between them in local currency. Thatīs an unnobserved move towards the demise of the dollar as universal trading and reserve currency.
Such agreements are going to become more frequent. There is no point in giving the USA for free huge amounts of value as segnoriage and financing their wars and comsumpion excesses.
Have a good time, and thanks a lot for your analysis and insight.
SG

[Wild Style]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

Yes, that WAS NOT the implication I was thinking of. (It's that other thingy)

Can you expand on this "other thingy"?

[RebbePete]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

As far as inflation/deflation, instead of a $300 "rebate" check, picture the government sending a $300,000 rebate check. Under a fiat money scheme, such a thing is always possible with the click of a mouse.
The Fed has broken so many rules lately, and gotten away with it, I see no reason for them to stop now. That's why I believe that inflation will win in the end, since inflation solves so many of the government's problems, and deflation causes so many more. There's a big incentive there for government to inflate their way out of trouble.

The reason why "today is different" than the 1930's is that every nation is on a fiat money system. The big question for central banks is whether they can coordinate their efforts so all major currencies "debase" by the same amount. If so, the inflation would be able to be controlled so it doesn't explode into hyperinflation.

A question I've been wrestling with is whether money itself has become obsolete. If so, what would replace it? Even now, "money" isn't the traditional stable store of value, but rather a fluctuating vote of favor or non-favor bestowed on individuals, industries or countries. I don't think a precious metals standard is in our future, so, if starting from this point, how would one design a system in an environment like ours with "virtual" money? Maybe the interpretation of money as someone else's debt has to be abandoned.

We do live in interesting times. This is going to get really bad in the short term. I have been keeping about one month's living expenses in physical bills in case of a bank holiday. I do have some precious metals, but, in case we're reduced to a barter system for a while, it wouldn't hurt to have some easily tradable supplies (foodstuffs, etc.) or skills (carpentry, hunting, etc.) just in case.

- Pete

[c1ue]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

Pete,

Every nation is on a fiat money system because it was impossible to stay on a hard money system when the major drivers of international currency were inflating.

However, there WILL be a point in the future when people's expectations of the behavior of fiat money is so negative that there will need to be a return to hard money.

You may be interested to know that Britain was actually one of the first nations in the last 2 centuries to go off hard money; that experiment ended in failure because memories of fiat money failures were too recent.

The recent bout of fiat currencies breaking out all over the world can be viewed to some extent as a reaction to the Great Depression.

The Great Depflation will at some bring bring us full circle.

[santafe2]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

We're going to have deflation first as we approach the ZIRP mountains, then we're going to have inflation.

Outside of the US it will be primarily a disinflation though Europe could see deflation also.

High interest rates are coming - but with them (preceding) will be high inflation.

Unfortunately for commodities the next will likely be only a moderate rise as initially demand falloff cancels out early printing, but there is a real possibility of hyperinflation touching off in one or more nations at which point the moderate rise will become an asymptotic one.

Fasten your seatbelts!

C1ue, Your assessment surprised me. It seems clear that your distinguishing between disinflation and deflation in the US. Are you taking a monetary point of view regarding deflation? That is, an actual contraction of the money supply, or are you talking about price deflation within an overall disinflationary or inflationary environment from a monetary point of view.

I ask, because I've never considered outright monetary deflation a possibility in the US until the last month or so. I'd like to hear more of your thoughts on this. If you've covered it a pointer would be appreciated.

[GRG55]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

C'mon all of you silent iTulip hordes! Your multitude is growing like King Kong. Speak up on this question. Lots of us would like to get a glimpse of where the majority view is.

...GRG55, gt_theo, gvozden, ...

Have to admit this is the first time anyone has lumped me in with the "silent iTulip horde"...

My short answer is "no", no deflation. To quote EJ, "disinflation, followed by lots of inflation".



IMO there is an interesting dynamic in the commodity sector, that is "different" this cycle, and deserves a close watch.

• As commodity prices lifted off early this decade, much of the cash generated by the major players went into buying each other out remarkably early in the game...normally this happens in a rush right at the end of the cycle [some examples include the buyouts of Inco, Alcan, Falconbridge, PlacerDome, Phelps Dodge...all firms that have been around for decades, some for more than 100 years]. Very little of that cash changing hands did anything much to increase the total supply of said commodities;
• In the 25-year long bear in commodities, coincident with the FIRE economy years, the major producers completely decimated their Exploration Departments as part of their cost-cutting survival efforts. "Growth" through M&A, especially in the final cheap-credit blow-off was the only logical strategy for them;
• Much of the so-called "new supply" of various commodities is supposed to have come from the junior explorer/producer sector. A considerable amount of all the money raised this decade to invest in commodities flowed to that sub-sector, and the usual snowstorm of press releases claiming dramatic new discoveries and resources ensued. Even the hedge funds and boutique investment houses like Toronto's Sprott Securities got into the game [see this iTulip thread]. A quick check of Sprott's recent stock performance on the TSX will indicate why some of the less nimble hedgies are also now in deep doo-doo.
• For a variety of reasons I question the real value of many of these discovery and value claims: a) many of the "new" discoveries were in fact old finds from decades past that were too small, too remote or too complex to mine economically, and are only of interest as an opportunity to promote stock prices in a bull market, b) most junior exploration companies are run for the benefit of the management and directors...essentially lifestyle support vehicles...and contribute nothing to the actual usable supply of the commodity in question, c) quite naturally the remuneration [stock options, etc] available to geologists and engineers in the junior sub-sector attracted the "best and the brightest", or at least the most presentable and articulate [for the capital-raising dog and pony shows], some out of their layoff-forced retirements, others directly out of the majors, further compromising their ability to execute their genuine supply expansion projects;
• The cycle time from exploration to production is quite lengthy for most commodities [crude oil is the notable exception] and generally very capital intensive, requiring the repeated raising of new equity by the junior explorers. This cycle [so far] has been too short to execute very many large scale new mines and mills. The door to new capital is now closed, even for the minority of junior companies that have genuinely economic mineral deposits;
• One consequence of all this is that the supply response in this just-completed up-cycle was quite pathetic compared to historical patterns. Current inventories for many commodities suggest this;
• Another consequence is that the highest quality producing supply sources, and most of the genuinely economic expansion opportunities, are now concentrated in the hands of a very few global producing giants [BHP, CVRD, Freeport, etc. come to mind]. In petroleum somewhat the same dynamic has occurred, but more due to historical and current nationalisations rather than M&A [Aramco, Gazprom, PDVSA...];
• The surviving majors have some of the strongest balance sheets of any sector anywhere in the world. As the current financial situation finally settles down, it would not be surprising to see even further concentration of assets as these companies use their [still] accumulating cash to pick off and take out the genuinely valuable assets from the now crippled junior sector;
• I expect the majors will move cautiously, although they'll be under a lot of pressure from Wall Street as it's one of the few fee generating opportunities for what's left of the investment banks. Although some, like BHP's Chip Goodyear, have retired, for the most part the senior management teams of these companies are old enough to have lived through the very difficult quarter century of deflating prices, and the continous beating they took for years from Wall Street regarding overcapacity. The recent short up-cycle wasn't near enough to heal the wounds I suspect, and for the first time in three decades cash rich resource companies hold the upper hand over the banks.

So what does this imply?

I expect a much more aggressive supply contraction than we have ever experienced for most commodities.

Mines are being shut down at a startling rate. Extraordinarily well run companies with sound balance sheets, like Chesapeake Energy, are shutting in unhedged natural gas production and laying down their drilling rigs. Credit to keep marginal operations running is simply not available. Equity and debt capital to add new supply is severly limited. Experienced talent remains in shortage as well [Boomer age people like me, who've experienced these cycles before, have dropped out and plan to spend the next while doing something more satisfying than trying to "sail in a hurricane". You would not believe the number of my resource-sector business associates and friends that plan to voluntarily "work on their golf game" this winter].

As each dis-inflationary "Ka" has required ever lower administered interest rates and ever greater monetary and fiscal stimulus to arrest it, quite possibly the next inflationary "Poom" might be a record setter too...:cool:

Edit Added: BTW the number of competent commodity analysts on Wall Street is less than the number of thumbs on your left hand. These so-called "analysts" were completely behind the commodity inflation curve during this entire decade, and now are belatedly trying to redeem themselves by "getting ahead" of the decline they've been predicting since copper went above a buck and oil passed $40. That they have no clue should not surprise anyone. Aspiring to be a commodity analyst hasn't been a rewarding experience since 1979, so why would we expect anyone with real talent to enter that sphere?

[c1ue]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

C1ue, Your assessment surprised me. It seems clear that your distinguishing between disinflation and deflation in the US. Are you taking a monetary point of view regarding deflation? That is, an actual contraction of the money supply, or are you talking about price deflation within an overall disinflationary or inflationary environment from a monetary point of view.

To be clear, the deflation I speak of is vs. the peak reached in the summer.

Compared to 3, especially 5 years ago it will be considered disinflation.

But the model I am working under is the Sudden Stop - it is not clear (yet) that it will occur, but the characteristics of an economy going into a Sudden Stop is a short period of deflation (vs. peak) followed by a period of very high or hyper-inflation.

As for definitions - I'm of the opinion that cash and credit must be lumped together along with each sector's associated velocity. At present I firmly believe the sum is negative vs. any time in the previous 6 years, perhaps much longer, despite massive credit dumps into the system by the Fed, but will turn very positive very quickly.

The analogy is that of trying to start a wood fire by pouring cooking oil onto it.

At first, there's just a lot of smoke.

But once flash point is reached, Whoosh!

I consider the hundreds of billions already lent out in 'temporary' Fed actions, plus the trillions to come in the government bailout, to be a whole lot of cooking oil.

Unlike some, however, I'm also not looking exclusively at our government's actions. I'm looking at our foreign creditor's actions - specifically China.

The recent flattening of the yuan could be the beginning of a completely different monetary policy there. Without even necessarily seeking to damage the US dollar, China's recent switch from yuan protection to growth mode could itself be enough to tip the dollar pyramid.

But of course the upcoming Treasury 'pig in the python' isn't going to help either.

[audrey_girl]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

hopefully this is still "on-topic" - with all the bad news and everything, decided to take a vacation to the islands to get away from it all...lookie at what is on the front page of the local paper this morning:

http://www.honoluluadvertiser.com/ar...LOCALNEWSFRONT

Poor Hilo Hattie...

anybody who has been here will get the significance of this...

oh well, if the world ends I guess this is as good a place as any to be....

[jtabeb]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

Can you expand on this "other thingy"?

I was trying not to force-feed people

but since you asked.

The way I see it is:

Hyperinflation in currency MEETS HEAD ON with:

Hyperdefaltion in assets as credit collapses MEETS HEAD ON with:

Globally constrained resource base (extraction will go down for mined resources available or not) MEETS HEAD ON with:

People Just now starting to become aware about the reality of the situation MEETS HEAD ON with:

People not maintaining spare ANYTHING money, food, water etc. :

MEANS

well...

"That other thingy"

I don't like to use "that other thingy" because I'm not trying to scare people. So I would just like to say that change is going to happen FAST and you should use your brain to figure out HOW things could change and HOW you can prepare the best of based on your own ability.

It's the transitions that are hard, the rest is steady-state muddling through. We haven't really had a transition yet. I think we will.

Peace.

JT

[huntg]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

We will see global deflation and likely a deflationary depression before we see an all out attack by government on the forces of deflation to create inflation. Governments will react to slowly, as they have, and not understand the severity of the situation. Government will propose band-aids like Tarp and refuse to ease like the ECB creating the situation where trust will be lost and the populace will hoard. In a desperate attempt to keep the old system alive, coordinated government easing will begin and massive printing via public works programs to inflate the debt away. My guess is equity markets re-test 2002 lows, down another 30-40%.

[ASH]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

Well last time I checked we started two wars already, and we are ignoring Pakistani warnings not to stage incursions into Pakistani territory, so that would be three (and Pakistan, like Turkey, has a large and quite tough army). So we've got at least two wars under our belt, and we've had a nice kiddy practice-run at inflation for the past five years. I'd say with the baby KA unfolding now they better get their inflation motor firing on all 12 cylinders or big papa bear KA will have the incoming new President squarely by the throat in just a few months.

Earlier I opined that American incursions into Pakistan had been coordinated with the Pakistanis because they occurred immediately after a meeting between our respective military leaderships. Given the exchange of fire between Pakistani border troops and our helicopters, it sounds like I drew the wrong conclusion. On the other hand, according to the Associated Press, the Pakistanis are officially saying they fired flares as warning shots, which then escalated into an exchange of fire. That may mean both sides are trying to smooth this over, or that a face-saving display went wrong. Elsewhere, it is reported that Pakistan has accepted a small contingent of American trainers for their Frontier Corps, so it appears that some level of cooperation is being preserved. I also read that America has been rethinking the wisdom of these incursions, but I cannot find the reference. I still get the impression that this won't blow up, but I guess we'll see.

My sense is that the economic crisis is more likely to preclude our ability to finance war, rather than spark a new war. I also think the material and political capacity of the United States to wage fresh war is very limited.

In personal, but somewhat related news... my employer is petitioning for an "employment hardship exemption" to my activation from the IRR on the basis that I am a "key employee". I did not ask him to do this -- and will not file for a personal hardship exemption on my own behalf because the personal hardship exemption smacks of the Vietnam era college deferment by which the well-to-do avoided the draft -- but it looks like there is a chance I won't be taking an all-expenses-paid trip to the Middle East after all. Of course, there's no guarantee my employer's petition will be well received. I'm still scheduled for a medical screening on October 17th. As with Pakistan, I guess we'll see. In the meantime, I'm trying to get back into something resembling military shape, in case I do get called up.

And to all: great thread!

[Wild Style]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

I was trying not to force-feed people

but since you asked.

The way I see it is:

Hyperinflation in currency MEETS HEAD ON with:

Hyperdefaltion in assets as credit collapses MEETS HEAD ON with:

Globally constrained resource base (extraction will go down for mined resources available or not) MEETS HEAD ON with:

People Just now starting to become aware about the reality of the situation MEETS HEAD ON with:

People not maintaining spare ANYTHING money, food, water etc. :

MEANS

well...

"That other thingy"

I don't like to use "that other thingy" because I'm not trying to scare people. So I would just like to say that change is going to happen FAST and you should use your brain to figure out HOW things could change and HOW you can prepare the best of based on your own ability.

It's the transitions that are hard, the rest is steady-state muddling through. We haven't really had a transition yet. I think we will.

Peace.

JT

Ah, ok THAT other thingy lol ;)

*sigh*. This is going to be a interesting ride indeed.

[Guest]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

Good luck with the deferrment ASH. Else we'll be getting posts from your blackberry out in the field, (in Iraq?). Your wife must be seriously teed off with this development.

But it looks like there is a chance I won't be taking an all-expenses-paid trip to the Middle East after all. Of course, there's no guarantee my employer's petition will be well received. I'm still scheduled for a medical screening on October 17th. As with Pakistan, I guess we'll see. In the meantime, I'm trying to get back into something resembling military shape, in case I do get called up. And to all: great thread!

[ASH]

Re: Anybody see global deflation looming here? How about an opinion from all you silent observers?

Good luck with the deferrment ASH. Else we'll be getting posts from your blackberry out in the field, (in Iraq?). Your wife must be seriously teed off with this development.

Fortunately, my wife and I are on the same page. While the timing is personally inconvenient (what with the baby and all), this isn't an entirely unexpected development. We had thought it more likely that I would be activated during the four years I was drilling with a reserve unit -- and much less likely that I would be activated out of the IRR -- so we waited to have a child. As it turns out, we got wildly lucky during the period when I was drilling, and mildly unlucky while in the IRR, so I'd say it balances out. We both pretty much figure it's my turn, and we both agree that I shouldn't try to get out of it, but leaving my employer to look after his own interests is fair game. (It would be a lot harder if she was pressing me to seek a personal hardship exemption or deferment "for the good of the family", but she's not.) To be honest, my life will be a lot more pleasant if my employer prevails, but a lot more "interesting" if not. I'd definitely post to iTulip from whereever I could get internet access... although the topic would likely be the economics of trading different MRE ration components for baby wipes, rather than inflationary depressions.