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

[rj1]

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!

Which service? Army Reserves?

I doubt your employer will get his request accepted by the government. There's a terrible troop shortage. My family is somewhat attached with the Marines. They were trying to withdraw troops out of Iraq because the fight in Afghanistan has ratcheted up and we need them there with the Taliban's renewed insurgence, but the Iraqi government got wind of it and pissed and moaned about it and so we agreed to stay. Put it this way, the Eastern Air Base Headquarters for the Marines only has two squadrons at it, rotating in and out by ending their tour and then getting deployed some months later, and it's been that way for a few years now.

[rj1]

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!

Maybe we were reading what everyone else wrote first!

(Also, how can you say San Diego sucks?)

I agree with some others that there is deflation and inflation aspects to what is going on. I completely disagree with the "Mish Point of View" that there will be wholesale deflation on the cards for EVERYTHING. The government is printing so much money that they'll do everything they can to prevent it. Aspects of the current economy - real estate, stock market, "paper money instruments" (i.e. securities, default swaps) will see their values deflated further. Not sure how much. One key problem is what's getting deflated there is pretty much all of the wealth of the middle class (their house on a couple acres, and a 401k or IRA). So there will definitely be follow-on effects from that. espn.com yesterday wrote a good article talking about the effect on sports from this financial downturn that was a good read and very broad. Attached here:

http://sports.espn.go.com/espn/otl/c...are&id=3622898

Credit is just going to cost more, deal with it. I think a large scale of the current market shock is this idea that you can't borrow money for as low a price as you did previously. The only entity really lending out money cheaply is the Federal Reserve and they're giving out gobs of it. Good for the primary dealers, not for anyone else that doesn't have access.

Part of my problem with the Federal Reserve and considering the "Law of Unintended Consequences", is that they are trying to stave off all this debt destruction by printing money and giving to everyone, including central banks. This strikes me as trying to balance on the head of a pin. Not enough money, you fail. Too much money, you fail. You have to be exactly right in order to keep everything functioning as it was. Also, when deflation is finally "beaten", it's not like the Fed can turn off the spigot and state "all is well", they'll most likely overshoot, that money will still be out there, and we'll deal with serious inflation for awhile. When will that happen, I don't know.

If I were a foreign central bank or private bank right now, I have no idea what I would do short-term other than keep functioning. Long-term, I think I would set a goal to have dollars be a very minor part of the portfolio by say, 2015. No larger than the euro for example. Not that the euro's much better (and has serious problems as shown by the Irish and Greek 100% guarantees and no coordinated action), just that way one foreign central bank or private bank will not have the Federal Reserve with so much control over your country's or your bank's financial decisions.

[raja]

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

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

I know when I'm trying to sell something, and I'm having trouble doing so, I lower the price. If people don't have money to spend, business owners have to make their products more attractive . . . tightening their belts, too. Everybody gets poorer.

Perhaps you think this effect will be countered by rising input costs . . . but I imagine that they'll be lowered by the same phenomenon. I'm betting all commodities down.

So, I'll stick with my assertion . . . lower prices.

[Chomsky]

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

Mish sees deflation:

Will Printing Lead To Hyperinflation?

Many have asked if the actions of the government would lead to hyperinflation. Others mockingly told me that it would. Nope. The answer is the same: Deflation.

There has never been hyperinflation in history with falling home prices. And home prices will continue to fall. Wasting $700 billion will not do the stock market any good either. The bottom is not in. Today's close proved it. There are new lows on the S&P 500, the Nasdaq, and the Dow.

Yes the Fed will print, but the money will sit, just as it did in Japan. Wasting $700 billion will only make things worse. Banks will still hoard cash.

http://globaleconomicanalysis.blogsp...ppens-now.html

[Guest]

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

Chomsky -

Counter to what some may conclude, I did not topic this thread as such because I see global deflation as the largest outcome.

If your are endorsing Mish's theories you either have read EJ's analyses and rejected them, or you have not read EJ's analyses covering this point. The overwhelming thesis remains for inflation out through the next 15 years - this however likely is indeed the long awaited Ka, and it may even be several years long. Have you actually noted EJ's tally of exactly how many severely net debtor nations have devolved into "deflation"? Uhm, try "none". If you were not aware of this datum you did not read his tally on that point.

Put data like that before Mish, or data evidencing what happened to US deflation once the US went off the gold standard in the great depression, and he suddenly is "too busy to reply" or he takes refuge in mere generalized petulance. He suddenly becomes unconvincing.

The instances of full blown deflation pertain to nations with either a gold standard (where the denominator against which the deflation occurs is not freely debase-able by the central bank) or in nations with a very robust inernal pool of savings. Sure we may have an engulfing move by debt liquidation worldwide, but the global fiat currency standard AND collapsing global oil production (now accelerating) clearly imply the opposite result. I have read Mish debating EJ, getting "down to brass tacks" on this issue as it were, and he is suddenly evasive. I would not trust Mish's guidance, although he is absolutely rolling in clover in this environment.

I call this to your attention only because if you find Mish's theses hold water at the macro level, then reading around here would make no sense other than if you were merely trawling for opposing theses. They are antithetical.

Respectfully.

p.s. Chomsky I in no way wish to dissuade you from disagreeing - in fact your disagreement is highly valuable to the discussion.

[laphroaig]

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

I know when I'm trying to sell something, and I'm having trouble doing so, I lower the price. If people don't have money to spend, business owners have to make their products more attractive . . . tightening their belts, too. Everybody gets poorer.

Perhaps you think this effect will be countered by rising input costs . . . but I imagine that they'll be lowered by the same phenomenon. I'm betting all commodities down.

So, I'll stick with my assertion . . . lower prices.

What are you selling? I can see you can lower the price indefinitely if you are selling something you already own, and have no further need for.

But businesses are normally selling something that costs them a certain amount to manufacture and distribute. In the long run, they can't sell products below that price (in the short term, they might discount heavily to liquidate excess stock). If they can't sell the product for a price that covers their manufacturing and distribution costs, they'll stop operating in that business altogether (they'll either go bust, or find another market to get into).

Because business is competitive, most producers of goods are already selling at a low margin (any business that makes a high margin will tend to attract competitors who will undercut the prices).

So if consumers stop buying at current prices, the long term net result is not lower prices, but fewer companies selling the product.

Those companies who do manage to stay afloat will now be under less competitive pressure, and so will take the opportunity to raise their prices.

Bottom line: if consumers stop buying, this will ultimately lead to a lower choice of products, at higher prices.

[skurla2000]

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

I wanted to quote Mish's site when talking about inflation:

Proper Definitions of Inflation and Deflation

Those who believe inflation is measured by the CPI, the PPI, or price increases of any kind desperately need to read Inflation: What the heck is it?, Interview with Paul Kasriel, and Deflation American Style.

The definition of inflation I am using is "A net increase in money supply and credit". Deflation is the opposite "A net decrease in money supply and credit".

Looking at deflation in terms of money supply (money that is actually lent) and credit (marked to market), the proper conclusion is the bailout bill does not change the picture, and that picture remains deflation.

------------------------------------------------------

I think that most iTulipers expect that inflation will be exactly in the sense that Mish disregards here, in the general rise in prices and lower value of the fiat currency.

Mish does not say that this will not happen... what he does say is that we will have deflation as he defines it "A net decrease in money supply and credit".

I think most iTulipers would not disagree with this. We are seeing a destruction of credit that potentially will outpace the increase in "funny" money.

I don't see anything in this statement that precludes an eventual sharp rise in prices and an eventual increase in interest rates, such that positioning with long-term fixed interest rates for any credit use and non-fiat currency substitutes (PMs) is the right move, I think the two are actually somewhat in agreement.

[ASH]

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

Which service? Army Reserves?

Marine Corps Reserve. Corporal. MOS 0861 (fire support man, which is the enlisted equivalent of a forward observer) and 8023 (parachutist).

I doubt your employer will get his request accepted by the government. There's a terrible troop shortage.

I agree it's unclear. Most of the exemptions are granted for first responders like firemen or police.

The way I see it, if they're so short of manpower that they want a 34-year-old E4, then that's more-or-less why I signed up in the first place. Also, as you point out, a lot of the active duty servicemen have been pulling consecutive tours with very little time home. If I go once maybe one of my buddies won't have to go a fourth or fifthtime...

That said, I'm really starting to wonder at what point the government's need to fund fiscal stimulus and the bailouts will start to impact their ability to fund the war. So far, it looks like US treasuries are considered "safe", and the government isn't having to offer too much in the way of interest to borrow. I don't see how that can last.

[orion]

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

Lukester,
Will you comment on the overall response to your question? I was wondering if this was a probe to see how many differentiated between falling prices and contracting money supply. In that vain can the average guy really see contracting money supply with the bogus or lack of government figures? I would guess there is deflation based on lack of liquidity for banks.

[Guest]

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

That said, I'm really starting to wonder at what point the government's need to fund fiscal stimulus and the bailouts will start to impact their ability to fund the war. So far, it looks like US treasuries are considered "safe", and the government isn't having to offer too much in the way of interest to borrow. I don't see how that can last.

Ask Phirang. He's got some real conviction that this gambit with our international lines of credit should instead last indefinitely.

[Guest]

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

Orion - I would not pretend to know any better than you. I only have an opinion, just like you. I come here to get clearer ideas from EJ, and most of the time I find solid substance in his arguments. When I start a post like this it is not because I'm looking to collect errant viewpoints and then lecture anyone here on what I presume is the correct viewpoint, and certainly I don't have the knowledge to do so. Mish I discard. EJ leaves a very clear space in his analyses for the KA deflationary event and we should be digging around among his old posts covering that.

We all should at this time carefully look over what EJ's written as to what happens in debtor countries when their debt burdens begin to cause disintegration, and the lowering of interest rates approaches the "zero bound". There are two very different reactions at this point. Further complicating the issue, EJ clearly distinguishes the US with the global anchor currency from all the rest. There are a good few other iTulipers here that can decipher this mechanism much, much better than I and I have a lot of interest to read more on their deconstruction of that also.

I just know that iTulip has peeled back a lot of the popular generic conclusions about what "deflation" is, and has evidenced that it is rife with misnomers, opaque logic and sloppy assumptions which mix and match references repeatedly in shifting configurations as events progress. EJ's point is - there are zero instances of nations with severe balance of payment deficits and severe internal debt who's economic stresses ever devolve into deflation when they are on a fiat currency standard. He restricts himself to noting the historical precedent, which is not promising for the discharging of America's obligations via deflation.

The exceptions are A) nations on a gold standard (assets have something fixed to deflate against) and B) nations with strong pools of internal savings. Historically these were 1) deflations back when the world's nations were on a gold standard, 2) Japan, with massive internal savings, 3) US with massive inherent strength in the USD AND a gold standard, back in 1929. These cases were deflation. All the rest - i n f l a t i o n . Please press these questions with our senior members. I am not competent to answer them in any detail. But they are vital questions for our present moment, as the wrong position can decimate your investments in the longer run.

[orion]

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

Lukester - I definitely agree with the Ka-Poom thesis and yes the nuances of it will probably make or break us. I am working on alternates to PM holdings and getting out of the dollar. I see way too many ways for the government to take back what ever profit you made, unless you've got your trail very well covered or you started preparations long ago. It would be good to know what the politicians are doing as I am sure they will protect their money. I am convinved if you have the bucks you can get lawyers and accountants to get you protected. Congratualtions for getting so many people to respond.

[Chomsky]

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

Lukester,

I've been poking around iTulip for a few months, definitely a newbie. I don't know whether I agree with Mish or not, just thought I'd post it here to get a response from smart people like you. I appreciate your response, thanks.

[ravenmoon]

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

I know when I'm trying to sell something, and I'm having trouble doing so, I lower the price. If people don't have money to spend, business owners have to make their products more attractive . . . tightening their belts, too. Everybody gets poorer.

Perhaps you think this effect will be countered by rising input costs . . . but I imagine that they'll be lowered by the same phenomenon. I'm betting all commodities down.

So, I'll stick with my assertion . . . lower prices.

I have no idea why I feel the need, or want, to reply to this post or thread but this post reminds me of a story. My wife likes to read about the hardships people lived through in the GD. She read that at one time a person took a load of hogs to sell at the market, the person buying said the hogs looked thin and would not bring much. The owner thought about it and bought $50 of feed (I guess that would be a lot of money at the time) he then took the hog’s home, fattened them up, a few months later back to the market. The market buyer said the hogs looked good and he would like to buy them. The farmer thinking he did the right thing buying the feed, was shocked to here the price, the Best price would be $50.50. The farmer asking why the price was low was told people could not afford to pay more.

So at what point do companies just stop producing? The input cost cannot be grater than the output profit, right? The farmer above was part of the real demand destruction where it costs more to make than it can be sold for. Even things people need have a price where they become unaffordable without jobs that give them enough money to buy. Even if input cost go down the profit of that substance will still have to be enough to do much better than brake even. The farmer above lost money way more than $50.


The story went on to say the farmer sold the hogs went home and did not grow or raise things for profit. The only concern was day-to-day needs and NOT spending unless it was absolutely needed.