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

[jtabeb]

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

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!

Military service, the real Hotel California. "you can check out any time you like, BUT you can never leaeavvveeeee"

Keep your head down and your spirit high, bro! If you ever need a helpful Hellfire, you know who to call. (NO, not the Cobra guys, they think they can beat the air into submission, who do they think they are? Barry Benson from the THE BEE MOVIE!)

I've got good news too, Air Force should be instituting STOP LOSS here shortly, so at least I have job security! (whether I like it or not)

And here is a video of my next likely job (hence the hellfire ref.)

http://www.youtube.com/watch?v=5XFmpo_QATA

[Yaowarat]

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

I let Mish and Bill O'Reilly do all thinking.

[loweyecue]

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

I doubt I am smart enought to form an opinion of my own, I admit to being very confused by recent events. But based on what I have read so far I would say I agree with two streams of thought:

Currently we will see a mix of inflation in prices of day to day necessities, like food, gas etc. We will also see a deflation in the price of debt based assets like property.

Over the long run we will see some serious hyper-inflation. I just think it will come sooner than people here are betting on. I see additional bailout packages looming in our future followed by massive priniting. I also think multiple countries around the world will try to move away from the dollar as the reserve currency. This can initiate some type of panic where everyone starts dumping dollar denominated assets. So to me the safest bet is foreign currencies, I really believe the dollar will slide fast and deep.

So right now I hold a good deal of gold (I luckerd into a recent 12% rise in asingle day for GLD), a couple of foreign currency ETFs and have started moved some of my cash to a foreign currency denominated account. Only other funds I am still holding on to are in Energy sector and biotech/healthcare.

[raja]

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

Lukester, you wanted opinions . . . here's mine, FWIW.

Recession/depression hits due to credit crunch.
People lose jobs, and less money is spent (happening now).
Businesses lower prices in order to sell products . . . or go out of business.
Gov't "prints" money. Inflation.
People have more money to spend, but energy and all things made possible by oil get more expensive, so the money does not flow to businesses.
Economy worsens as housing foreclosures increase.
More job losses as business cut back.
In order to sell products, businesses continue to cut prices or go out of business. Deflation.
Higher unemployment means less money to spend.
Gov't "prints" money. Inflation. But rising energy costs (due to dollar depreciation) offset the increase in money.
Worldwide purchases of Treasuries collapse.
Gov't can't meet budget, gov't services cut back, more job losses.
Quality of life degrades dramatically . . . . :eek:

My thought is that any false wealth creation caused by inflation (due to gov't reflation) will be eaten up by higher energy costs, so the net result won't be inflation, but deflation.

[Jay]

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

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.

ASH, if you ever need some advice on how to get out medically, I do know some tricks...;)
Stay safe.

[VIT]

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

Lukester, you wanted opinions . . . here's mine, FWIW.

Recession/depression hits due to credit crunch.
People lose jobs, and less money is spent (happening now).
Businesses lower prices in order to sell products . . . or go out of business.
Gov't "prints" money. Inflation.
People have more money to spend, but energy and all things made possible by oil get more expensive, so the money does not flow to businesses.
Economy worsens as housing foreclosures increase.
More job losses as business cut back.
In order to sell products, businesses continue to cut prices or go out of business. Deflation.
Higher unemployment means less money to spend.
Gov't "prints" money. Inflation. But rising energy costs (due to dollar depreciation) offset the increase in money.
Worldwide purchases of Treasuries collapse.
Gov't can't meet budget, gov't services cut back, more job losses.
Quality of life degrades dramatically . . . . :eek:

My thought is that any false wealth creation caused by inflation (due to gov't reflation) will be eaten up by higher energy costs, so the net result won't be inflation, but deflation.

I used to live in hyper-inflation mode and I guarantee you will not feel anything like "false wealth creation". What you will feel is as you are becoming poorer and poorer every day. Think about this as you will get increase in every paycheck let say 10% but all prices will be 15% higher so you net salary will decrease every paycheck on 5%.

"businesses continue to cut prices or go out of business" - they will rise the prices everyday or go out of the business.

It might be not so bad on personal standpoint. If you have stable job in something what produces basic goods or can export goods/service you will be ok and even can "benefit" since many products/services will be relatively cheaper. You will not have any debt (old is destroyed and you can not get a new one) but no any savings too.

[cmraynew]

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

In U.S. (not necessarily in order)
Leveraged asset prices fall, because interest rates from banks increase—particularly in the stock markets, bond markets (non Treasury).

Treasury rates stay low, for their appearance of safety.
Banks fail in massive numbers, because they are insolvent with the higher interest rates. Too many bad loans and too many with low interest rates.

But the cost of debt service remains for the average American, and may increase, if you have an ARM, HELOC, credit card debt.

Meaning less cash for all goods, and less access to credit for assets, investment, and goods.

Heavy layoffs, unless the currency sinks substantially and exports can increase.

The prudent move for many will be to realign their spending--less of the extras, and the same to necessities.

But many necessities may be cut—energy costs (less heat in winter, less cool in the summer), food costs (less produce, more rice and beans).

Food and energy costs then stagnate, but appear high because wages decline or at least stagnate (in aggregate).

Around the World:

Energy, food, and metals appear relatively cheap (less demand from U.S. because lessened wages, less buying on credit). Increasingly exchange dollars and savings for goods rather than U.S. bonds.

If there is sufficiently robust domestic economy, then use lower commodity prices to grow infrastructure, businesses, jobs, at a rate faster than world’s average.

Big story: U.S. standard of living slowly grinds down relative to rest of world, over a decade.

Where I seem to diverge from EJ: the possibility of the big event. If there is war, or massive, concerted foreign selling of treasuries, then things could get as bad as EJ et al predict. It would seem though that there is substantial likelihood that no big event occurs; thus, long slow pain.
So, global deflation—no. Leveraged asset deflation in U.S. and elsewhere—yes.

[Guest]

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

moved down

[Guest]

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

Many thanks to all those who've stepped forward to make a comment. What about the vast majority who did not? What's the matter with you guys? You gain insights from reading these pages (primarily from EJ's input) but when you are asked to give some small input back you won't? It's a two way street - you get a lot, so offer a little back!

[Thailandnotes]

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

Many thanks to all those who've stepped forward to make a comment. What about the vast majority who did not? What's the matter with you guys? You gain insights from reading these pages (primarily from EJ's input) but when you are asked to give some small input back you won't? It's a two way street - you get a lot, so offer a little back!

shhh....hush!

[touchring]

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

I think it is almost confirmed that we will have global deflation by the end of 2009. Biggest chance to load up on commodity stocks by then!

[Louie.G]

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

Ok Lukester heres what I think. I am not an economist so forgive me if I have something wrong. Here is my chickensh*t theory

Now this all depends on which chicken lays which egg. Therein lies some of the problems. As I see it the global economy has many clucking chickens who are not too sure which egg will fall out next.

These chickens are

China - Chickenman - Manufacturing base becoming more uncompetitive, and economy slowing - Lots of USD Investments
EU - Chickenyuk - Bunch of dislocated countries with a common currency, Banking Problems and governing rules that help some EU economies and hinder others. (A hamstrung Chicken)
UK - Chickenbrain - Has old money but an economy in trouble
US - Chickenhead - has all of the problems but is reserve currency
AUS - Chickenlittle - Head in sand. They think they will be immune to everything cause they have "sound" banks and a good relationship with China, Ohh plus minerals. Reality may be a bit different tho me thinks
Mid East - Chickenoil - Lots Money from Oil

All or most of the chickens have common problems

House price deflation = J6P Feels poorer by the day & thus more scared
Investment deflation = "Savings/investments" not as valuable... err sorry... HIGHLY PRICED as they were
Debt Deflation - This one confuses me, cause if debt is written off, then liabilities are decreased, but the owner of the note would suffer from investment deflation, true?? If I owe $1 less then someone, somewhere is owed $1 less so therefore......

would not ......... Debt Deflation = Asset Inflation ??

Some of the Eggs
Less access to loan money = J6P has less money, spending reduces, economy slows.
Lack of faith in Banks = less cash in banks (a run) Banks fail
Banks frail or fail (caused by walks or Writeoffs) = more bank runs occur
Economy slows because of fear and/or insufficient credit
commodities such as oil etc deflate because of less demand
Cost of shipping goes down, China becomes slightly more competitive but no one wants to buy their goods anyway cause they have no spare money.
CBs pump in money to support their own or another economy (or to feed their friendly fat cats a chicken supper)
Currency depreciations or appreciations ( I do appreciate money lol) depending on CB's view of and intervention in, their economy
CBs drop interest rates to boost economy
Banks increase fees to help cover costs of writeoffs, bad investments etc - economy slows

Because of off balance sheet items and no transparency in financial transactions, the chickens are all running around the yard in the dark, dropping eggs everywhere, in a big panic, so there seems to be no semblence of structure, leadership, nor order anywhere.

I guess if you are a statistician you can calculate the probability of the egg you are picking up, being the one you expect it to be, but the odds of that happening are pretty slim and getting slimmer.

So globally I feel we will have inflation, deflation, disinflation and every other confliguration you can thing of, all happening at the same or different times depending on which chicken lays which egg and who picks it up when. And most importantly it depends on the IQ, needs and wants of the egg Picker-upperer and the needs, wants, desires and beliefs of the chickens.

Ohh BTW it is VERY dependent upon the openness and honesty of the egg picker-upperers declaring that the egg he/she picked up is actually the egg he/she picked up. (As if that will ever happen).

Sorry if this is not economically correct theory and/or language, but that is how I see it at the moment.

Cheers

[gvanc]

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

Hello Lukester: I have enjoyed reading your thoughtful postings over the last several years. Are we now well into the long awaited "Ka" of the EJ "Ka-Poom" model? Is the Ka (by my simple understanding) the period of disinflation resulting from debt deleveraging forced upon the economic system? Over the past year of reading iTulip I recall posters asking whether we had passed the Ka and were into Poom already with the rapid increase in commodity prices. If this is the Ka (and according to what I think Ka is, the current market/economic slide sure feels Ka-ish to me), I would guess the inflationary Poom is sure to follow as the world CBs coordinate to do all that they can to prevent a deflation positive feedback loop from crushing the world economy for the next 10 years. I am also convinced that surrounding all economic disruption brought about by debt leverage are the limitations to growth that will be imposed by resource constraints, particularly when the world starts on the down slope of conventional crude oil production.

[Slimprofits]

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

Here you go, Lukester:
A London stroll proves we're in recession

When I went out into Central London this week to search for evidence of the downturn, a quick walk along Oxford Street seemed like a good start.
It was every bit as depressing as I had expected. House of Fraser: sale. Jane Norman: sale. Even Gap had a mid-season sale, at which you could pick up jumpers at 40 per cent off and jeans at 50 per cent off.

[..]

The one good thing about a recession, though, is that you can pick up a bargain. At Delcor, a sofa shop on Tottenham Court Road, the weary look on the faces of the staff said all that was needed about the lack of custom.

I tried out a large corner unit in white leather; list price £12,174, offer price £9,129. “How about £7,500?” I asked. The shop assistant looked a little pained. “£8,000?” I tried. It was a deal. If I had produced my credit card, I think I would have made his week.

[due_indigence]

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

Here goes waay more than you ever wanted to know...

I am utterly fascinated (or is it horrified?) that, as we gaze over the edge of the abyss, mere inches from the fire-pit, there is still no consensus as to whether we will fall UP or DOWN. Our eyebrows are getting singed and it's still a friggin' rorschach test! I see a dog. You see a camel. I say tomato. You say tomahto. This is a stunning testament to the state of that dismal 'science' economics. Of course when the boulder eventually falls on our heads, there will be scores of economists to explicate every dimple on it. So thank you in advance for the post mortem. Please have the aptly-sloped curve engraved on my headstone.

The point is (the itulip thesis notwithstanding) that reasonable minds even at this late juncture can offer cogent arguments for either deflation or inflation. Moreover each side is buttressed by some compelling empirical data, debt deflation and 'real-stuff' inflation. Waxing existential, even Old Testament moralistic (hopefully in the best sense of that word), I would say we are witnessing the collapse of artifice and the re-ascendance of ageless truths. I might even say that the impending gnashing of teeth period will clean out many excesses. It's no coincidence that the WWII generation made its bones in the pit of the Great Depression. So part of our horror at this Great Depression redux stems from a pathetic reflex in our consumerist souls. My God, the Lexus may be on the line! So shame on us for viewing deprivation with such withering contempt. It can be a curative too.

Even the ka-poom theory offers a bifurcated picture, a 'down-UP' scenario. Furthermore, deflation and inflation can coexist in seperate corridors of the macro environment going about their business like fire and ice. So the more fitting analogy may be a wrestling match --as opposed to a horse race. Which force will cut a larger swathe and carry the era? And will the other force come in a near or distant second? This is quite literally the million dollar question, or if you inflationists prefer, the trillion dollar question.

Okay I'm sort of an odd bird. With an MBA in Finance and some corporate time under my belt, I'm not wholly clueless about things macroeconomic. But I'm more a writer now in a literary vein. I should also say that the seeming arbitrariness of supply and demand lines, Laffer curves and the like have always troubled me in a way I have difficulty rendering in words.

I'm interested in a deeper and more sublime examination, less quantitative, more in the vein of political economy and philosophy, dare I say even biblical fatalism. Let me offer an intuition in that friendy vein. I am struck by the notion that a multi-million dollar building can be verily brought low, down to an economic value of zero. Am I right that once-mighty sums (multi-trillion dollar derivatives markets) can be rendered valueless (vicious deflation) whereas a loaf of bread might 'soar' to $100 (barring a Weimar hyper-inflationary environment)? Is there perhaps an embedded incommensurateness that offers deflation the victory lap in this tug of war? Is there a law of large numbers at play here (i.e. big numbers pack a lot of b.s. and have much further to fall)? Is an athlete being 'worth $100,000,000' symptomatic of a moral disconnect? Do the Rolling Stones really 'earn' $100,000,000 on a two-year world tour in the sense that the vast body of humanity, past and present, understands the sweat and toil of earning? Exceedingly large numbers have somehow swallowed pixie dust. They have the farthest to fall. If there's any empirical basis for this overheated waxing and waning, I might offer regression to the mean.

Deflation tracks well with a humility curve. It is the moral equivalent of 're-learning the value of a dollar'. Deflation slays hubris like a good Greek tragedy (the odious Gordon Gecko 'greed is good' ethos). The limits of a society are tested when one man earns an obscenely 'inflated' salary equivalent to the sum of hundreds of his fellow citizens. A currency is already somehow 'debased' when someone shovels gobs of it into his pockets as 'reward' for spectacular failure. There's fiat currency and then there's utter bullshit. When the bullshit looks like gold and the old virtues look like bullshit, a sea-level change is nearing. Bullshit can only smell good during brief spells of eccentric wind patterns. Sweet-smelling bullshit is unsustainable.

Okay, so my moral compass is hinting at a Grand Reduction. Yes I know, this is flakey and empirically devoid.

How about some analysis unfiltered by personal greed? Dispassionate observation without necessarily converging on an 'investment plan'?

But okay, investment strategies are the vogue. Then how about a respectful bifurcation? Buy gold as an inflation hedge and hold cash as a deflation hedge. The danger with buying gold 'pre-ka' is losing value to deflationary downdrafts. But that then introduces the elephant in the living room, market timing. So a dollar-cost-averaged acquisition of gold equal to the 50% of a portfolio with the remainder in cash. Then an accelerating gold acquisition if the onset of the Poom period becomes indisputable.