We’ve had a rollicking good time in the Rick’s Picks forum lately as inflationists sought to rise to the level of debate in explaining why deflation is unlikely. You can judge for yourself how well they succeeded by clicking here, but on our scorecard, at least, they didn’t win a round. How could they have when they are evidently blind to evidence that the global engine is perilously close to being suffocated by deflation? As always, there were quite a few beleaguered consumers ready to testify that they are getting hammered by rising grocery prices. One of them is a friend of ours who lives in an L.A.-area home that has lost a third of its value in the last three years. That translates to about $400,000 – and yet, it is the seven percent increase in his sewer bill that seems to be bothering him most.
He’s not the only one who has remained oblivious to mounting evidence of deflation nearly everywhere: falling home prices, falling wages, falling rents, falling consumer credit, falling bank lending, a devastating collapse in financial assets, massive cutbacks in state and local budgets, the absence of pricing power for most consumer goods, etc.. Some might argue that the price of health insurance and college tuition have been hanging tough. Oh really? We see health care moving toward triage and rationing because it has become manifestly unaffordable for businesses and individuals alike. Under the circumstances, how much more medical inflation can we expect? Or do you buy the wildly popular, albeit counterintuitive, idea that “The Government” will somehow be able to afford for us what we can barely afford for ourselves?
Cutthroat Colleges?
Regarding college tuitions, we are on record with a prediction that the Ivies and top private schools will be going for each other’s throats within five years, lowballing the price of an online degree. A Princeton B.A. for $12,000 sounds about right to us. The impending deflation of college costs seems like a no-brainer at the moment. A college education has never really been affordable for most Americans, but it became even less so over the last 20 years, when the quest for that all-important sheepskin became a household obsession. Even parents who were ordinarily frugal did not hesitate to borrow against the inflated value of their homes to put their kids through school. Few imagined that this would prove to be a risky bet, but the collapse of home prices in the U.S. changed that. So where will parents get the money now? We really don’t know. But the colleges are in for a rude awakening if they think the money will come from “somewhere,” as it always has. Uncle Sam has placed Sallie Mae on steroids to help make up the shortfall, but we don’t see that as an answer, since housing collateral will be missing from the equation.
For decades, health care, college tuition and government spending have been intractable engines of inflation. Of the three, only the Federal portion of government spending remains so. To say that we have serious doubts that it can compensate for the fatal weakness in the other two would be an understatement. Why? Simply because any spending measures the Federal government undertakes to lift the economy must be financed by debt. If inflationists cannot see the endgame of this strategy, they deserve all the scorn and ridicule we can heap on them.
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Me thinks you protest too much with your inflationist bashing. Let’s see what kind of “deflation” we get with a currency collapse.
I would’ve thought that the debate would’ve cooled down by now, but apparently not. So I would like to put the debate in another way…
10,000 counterfeiters each print 10,000 dollars, 10,000 times each, and then go on a shopping spree.
10,000 counterfeiters each create 10,000 credit cards with a 10,000 credit balance, then go on a shopping spree.
What’s the difference between the two?
Both create inflation, but the money in the first scenario was accepted at face value, and so created no record of debt. Things will continue as normal. Even if the criminals go hyper, things will just resume their normal course in time.
Not so, in the second scenario. No amount of newly created money will retire the debt because each new dollar created is worth less and less. So, credit being no good (maybe it’s not available because it isn’t in demand?), and no amount of paper money able to pay it off… Depression it will be until the debt is paid.
Currency doesn’t discredit currency (else how would we ever have hyper/inflation), but credit-debt is destined to ruin.
Now, China, as some argued in the other topic, will somehow save the day (for themselves, at least), but that is over-valuing China’s capabilities (which, I add, they did a stimulus close to if not over their GDP). Given that the developed economies are laying flat on their backs… it will be a while before China becomes the big importer nation that the Westerns ones are. Even if they drop the dollar (which they won’t), they got a CLIMB ahead of them that is made all the more challenging that we need to pay them back so much. So why on earth would a country significantly behind the developed nations just shrug and say “oh well…easy come, easy go!” ? They can’t afford to do that, to just write it off like some many seem to think they will!
The debt will remain until it is paid. It can’t be paid through the usual means, so it’s a stalemate. Only when the world realizes and accepts that will the solution be put into action. The debt WILL be repaid but the “question” is… how (got gold)?
Oh yeah, and college tuitions… They can drop it to zero, for all that everything they had to teach about economics avoided their outrageous rates and resulting plunge thereafter. Oh well…easy come, easy go!
Rick, I have to agree with you, nonetheless all this inflationary hype as evidenced in the gold price I believe is a little ahead of itself, as far as currency collapse, we are far from zimbabwe style hyperinflation that some gold investors cheer and dream for. I buy gold long term and have no intentions of selling so I do appreciate the long term reasons behind owning it, however I am not under the impression that inflation is here, it sure could pop up in the future, but me thinks the fed will do whats necessary when push comes to shove as far as interest rate hikes and the like. Its amazing how some gold investors are so excited about the possibility of a currency collapse, their dream is my nightmare
Rick,
I enjoy your blog and if I were a trader, I’d subscribe for your insight. However, for thoughtful and detailed macroeconomic analysis, I’ll take Eric Janzsen.
No offense.
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I wouldn’t hold your breath waiting for Ka-poom and stagflation to play, James. RA
This post explains it better than I could Rick…
“Suppose, for the sake of argument that a world exists where banks are allowed by their regulators to pretend their default losses simply do not exist. And, even more outlandishly, some of these banks are allowed to sell heavily damaged loans to their central bank at nearly their full original price.
What does “deflation” mean in such a world? Not much, as it turns out. At least from a monetary perspective, because money is not being destroyed at nearly the rate that would be expected or predicted by the size and rate of the defaults.
This is the world in which we currently live. Trillions in probable and provable losses quietly exist out of sight on the balance sheets of the Federal Reserve and other financial institutions. If they ever come out of hiding and onto the books, I think the deflationists will be proven correct in spades.
But let me ask this; what prevents the authorities from simply storing them out of sight in perpetuity? Or at least long enough to allow the wave of liquidity to work its inevitable magic? So far, much to my great surprise, they’ve managed to do exactly that with hardly a squeak from the mainstream press (although the blogsphere is on the job, as usual). I am now wondering if they cannot keep this up indefinitely.”
http://www.zerohedge.com/article/guest-post-sound-one-hand-clapping-what-deflationists-may-be-missing
Personally I see your argument and the inflationists… I think we continue to get Stagflation like we have got through this whole year. Oil is in the 70’s yet there is no where to put any of it in the US… The dollar is down almost 20% from where it was in March… They are pushing the dollar lower and commodities higher while home prices fall and wages fall. Sounds like stagflation to me.
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“…falling home prices, falling wages, falling rents, falling consumer credit, falling bank lending, a devastating collapse in financial assets, massive cutbacks in state and local budgets, the absence of pricing power for most consumer goods, etc.. ”
That is what is happening at this moment. Does it look like stagflation? RA
Some months ago I made a very detailed and solid case in this forum regarding why and how we will see massive inflation. I would repost it, but I don’t have it. Lamentably, if hyper-inflation is to come, it will be due to the same sort of factors that caused it in, for example, Argentina. With that said, the recent articles by Robert Fisk are not comforting news for those who want to believe it can’t happen here.
Princeton may be down, but Emory isn’t. I know for a fact because I am paying the bill for a recent med school grad. List one medical surgery that is cheaper now than it was ten years ago, or five for that matter.
James really has a point about no deflation in a ‘currency collapse’. Presumably he is one of the 96% of people, however, who are now bearish on the US dollar just at the point where it is actually about to take off. You inflationists should read some Prechter too -not everyone’s cup of tea, for sure, but like Rick, one of the few to really have a handle on the bigger picture.
We’ve all read the “cash is king” in a deflation / depression, but the Fed and the US Gov’t have successfully been destroying the value of the dollar for decades. This process has been accelerating and I don’t anticipate either the Fed or USGov’t showing up for an “altar call” at the Church of the Sound Money before TEOTWAWKI.
Is the “John Denver” (R.I.P.) investment plan is the way to go? Use cash now to get that “fully equipped” ranch and go into survivalist mode. Does it matter if one prepares “the bunker” using dollars in a deflationary or an inflationary environment?
Is the Fed and USGov’t are secretly worshipping at the Church of the Japanese Lost Decade (or Two), where Fed Reserve Notes are the burnt offerings in hope for redeflation?
For now it looks like a slow, cruel, deflationary death for non-Fed government entities, private businesses, and indebted families. The one-on-one, Cash For ___ programs are band aids on a debt default limb amputations.
Maybe the Fed and Gov’t will “go nuclear” with the direct cash infusions (Rick’s “add 000 to the end my bank account balances”) when none of their prayers are answered.
Best of luck to all.
Deflation in the United States for certain, but to have a grasp of what may happen in the markets, think global especially what’s happening China/Asia. In the U.S., Walgreens vitamins and everything else on sales 2 for 1. Its easy to see the deflation situation there….and look at recent articles reminding us of one of Rick’s favorite topics; the whopping decline in NYC commercial real estate.
But meanwhile, here in China…oh oh oh it is nasty unabated INFLATION. The model here is a different animal, an elephant with a pink tail and green stripes perhaps. It is 200,000,000 Mr & Mrs. Li citizens with USD $100,000 cash in the bank, owning 1-3 apartments which have gone up in value somewhere from 3 to 5 times from USD $50k to USD $150-$250k., and on which they have ZERO mortgage debt and of course, zero household credit card debt. I am speaking of the newly formed middle class, NOT the wealthy. They are building in every city a brand new country here; new hospitals, roads, expressways, high speed rail system, fancy shopping malls, schools, and in every category prices have skyrocketed alongside this progress. There is no God here. There is money. Make more, show me more, want more. Steadily rising wealth, property bubble fed by govt liquidity, infrastructure assets, government and privately funed, and the prices of retail goods and services, but private sector business is NOT that good here either, so its scary. Meanwhile dear traders, where is the #1 performing Ritz Carlton in the WORLD right now?…Sanya, Hainan Island, China. Which as a nice proxy, proves who has more cash and vanity than anyone on the planet now? Chinese. Forget the gorgeous Hilton, Sheraton, Marriott…they are not the #1 top luxury brand. We only go to Ritz and we brag about how expensive it is. And do check my just published report on the property bubble here. So my question is how might the domestic expanding, inflating economy here in China possibly impact for better or worse the deflationary pressures in the U.S.economy? Related, China’s reactions to the declining dollar? Cheers, Mario, http://www.mariocavolo.com
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A fascinating picture of an economy poised to decouple from its U.S. patron when the time is right. Thank you, Mario, for your “report from the field.” RA
Thank you very much for that splendid article
Sorry Readers,
Posting at 11 pm was my bad.
The corrected paragraph, for what little amusement there is in it, should read:
Is the Fed and USGov’t secretly worshipping at the Church of the Japanese Lost Decade (or Two), where Fed Reserve Notes are the burnt offerings in hopes for reflation?
Again, best to all. Great, thought-provoking posts overnight. That’s for the forum, Rick.
Deflation ??? Why because real estate that rose 2000% in 20 years as compared to the 5 % – 7% percent annual growth from the 1940’s till sometime in the 70’s when the US dumped the Gold standard? Or because stocks that where priced at 60 – 70 times earnings (Think about that one for a minute – would anyone in their right mind pay 70 x earnings for a business) are coming back to realistic values. These are not essential goods and services, they are investments. Even if you live in your home you can always rent! These are items that are price subjective to supply and demand – not necessarily the money supply increasing or decreasing! For those that have forgotten, it is the money supply increase or decrease that determines inflation or deflation! I don’t see the cost of sugar, coffee, oil or other daily food items for that matter coming down. Does anybody else?? Could it be that the banks are not lending because they know huge inflation is around the corner and it has actually begun and therefore they will get paid in worth – less currency. If I was a wall street bank and getting next to free money from the FED i wouldn’t be lending to joe six pack or joe plumber either at 5 or even 10%. The USD has lost 20% of it’s purchasing power since March !!!!! Question IS THAT INFLATION or DEFLATION ??
I may not have a PHD in economics, but I believe the textbook definition of inflation is the loss of purchasing power of money due to an increase in the money supply. Economics 101 – Goods do not actually become cheaper or more expensive but rather it is the value of money that increases or decreases that causes the goods to appear more expensive or cheap! Quality Mens suit, shirt, leather belt and leather shoes = 1 Oz of gold for over 100 years now. Roman times 1 Toga, a pair of leather sandals and fine silk belt 1 oz of Gold! Inflation is here! – the Gold price that would ordinarily be reflecting that has been manipulated and suppressed for some time now. It won’t be so for ever.
Currency crisis before outright deflation.
I think the crisis is in the Yen appreciation vs. dollar, and by follow on causes, the Yuan. Not the dollar.
Gold prices may behave separately from commodities price declines due to changes in lease rates. You don’t lease copper or oil.
My bet is on stymie-flation.
F6
inflation is country specific, ie inflation in Russia in 1995 was 10% per month, if you didn’t live in Russia, no problem. If you were a pensioner in Russia without a fully indexed pension, then you were going back to work.
Take a step outside the box for a moment and look at this from a political perspective. And since just about everything today (including the Nobel prize) is sufficiently predicated on politics, it might be a sign to begin looking at the economic landscape through the prism of politics. Specifically, how those politics and the election cycle going forward relate to the current and future U.S. economy outlook.
In the context of what this society (in general) has become – i.e., a populace bred on instant gratification, 3-second sound-bites, political-correctness and platitudes from polticians, do you really think the American public has the stomach to suffer a slow, grinding, deflationary slog that drags on for years? You say they won’t have a choice? Really?
They just extened the unemployment benefits by another 14 weeks in all 50 states. And when that is used up, they’ll do it again – perhaps longer. $timulus #2 is already in the works. Don’t be surprised if the govt. gets a few more miles (months of political life and phony economic indicators) out of a $$-for-clunkers part 2 either. The party-in-power is not about to relinquish its newly gained seats from last Novemeber on the count of a ‘depressed’ economy. Of that, you can count on. Republicans love Power. Democrats love it just as much – if not more. Do you think they are going to roll without doing whatever it takes to dress this pig up enough to retain seats in 2010?
DO NOT underestimate the power, the will or the intent of a corrupt poltical and financial elite institution that is our current government, to do whatever is necessary in order to placate the populace, keep them hanging on to ‘hope’ – even when there is none, and find myriad ways to window-dress this economy up enough to get re-elected.
It is for the reasons given above that I do not think we will suffer a stagflation like the 70’s nor a long-winded depression like the 30’s. These are differnent times with different characters, different technologies, different monetary attributes, a decidedly differing Moral character throughout our society and polticial leadership as compared to even as little as 30 years ago and decidedly more unstable geopolitical climate than either of the aforementioned periods in history.
We are going in a direction – fast. It may be a deflationary collapse. It may be a high-inflationary collapse. It will definintely in due course, be a collapse. In my mind, the only factor is how quickly it will set in. Corruption has not reached a peak – yet.
My understanding of financial matters is very limited and simple and so my view of the inflation/deflation debate is likewise pretty black and white. But I’d appreciate a point cleared up for me.
I see the market forcing us into a deflationary period due to our outlandish living beyond our means for decades. This is one force.
Countering that force are the CB’s injecting money in an effort to counter and slow deflation. As Steve Saville says, the only brake on the amount of money the CB’s can put into their system is by the bond market and their choice to abandon a currency if the debt/QE input is too large. In theory, Gov’s can inject ever larger (unlimited) amounts of stimulus directly into sectors, industries, individual companies, states, people etc. as they are doing now in one form or another. Would it be enough to counter the markets deflationary force? Unlikely unless they make the decision that selling debt (ultimately limited) only is more important than larger QE efforts (ultimately unlimited).
To me, then, this is the main factor. To what degree will the financial world accomadate us printing and borrowing, for that is what will untimately influence the inflation/deflation debate.
I guess my question is, will the US ever reach a point where it doesn’t care if the bond vigilantes won’t tolerate unlimited debt/QE issuance? Does that mark the end? If that point of no return can’t/won’t be breached, does that mean that deflation will reign supreme until it has run it’s course.
Thanks, cp
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Hyperinflation, as I never tire of pointing out, would wipe out savers and lenders as a class. It would also wreck the institutional conduits of lending, including the bond and mortgage markets, for at least a generation. This is a very steep price to pay to emancipate debtors, assuming that were even desirable, and it is surely not the solution favored by those whom we would refer to as the ruling class.
This is an obvious flaw in the argument of those who expect the Fed to “do whatever it takes.” The Fed’s bailout strategies so far have made clear that it heavily favors the banks (lenders) over households (debtors). Is there any reason to expect the Fed to reverse course by targeting household balance sheets? Someone in this forum suggested that a populist revolt would eventually bring the politicians around to a hyperinflationary solution (and we should be clear that mere inflation will not do the job, since the deflationary juggernaut we would seek to neutralize is drawing its power from an imploding financial edifice worth many hundreds of trillions of dollars). At that point it’s hard to predict what would happen. Hyperinflation would certainly be possible, but it could not occur inadvertently or gradually. Rather, it could only be effected through the kind of political deliberation and decision that is likely to stir up violent class warfare.
RA
Up
DWP & Utility (Water, energy etc)
Communication – phone all add up lots of local to state governmental taxes
Tuition
Healthcare
Food
transportation
property tax
+
Stock market
Gold and Silver
Down:
Some consumer goods you can live without
Home prices in areas of housing bubble (in compare to 2004?)
Rent in area where job losses are sever
Labor salary
income
+
The cash value of your cash is shrinking fast into the future.
Hope I still have a job and can do it by 75. lol
p.s. Companies are now in cutting production rather than prices. I don’t see housing drop value is qualified as deflation because it was wildly overprice so it must come down. It’s now more reasonable than 2007.
I like C.C’s opinion of impending COLLAPSE. That is the key here, and it matters little, by ice or fire, figuratively speaking. Everything is being stretched to its limits, in the realm of Modern Civilizations. The whole S#!?House is about to blow. We have sown Vectors of Destruction in every direction, including that of the environment (which includes disease) – which might be the most dangerous of all. It is a cumulative effect and roundly ignored by economists (among others) in general. “The global weather change hoax” – yeah, right, dream on – if you live on some OTHER planet.
Oh well, the Civil Experiment is about to come to a conclusion – again! – though on a very large scale. Its demise will demonstrate (again) that it was not fit at all to natural human being. Will the lesson be learned?
When we show donors the long-term Econocast Consumer Price Index Forecast to measure against investment performance, they see more than a doubling of CPI over the coming decade after a few minor decreasing negative CPI blips last year.
Most people call this inflation. It is institutional inefficiency.
It is the cost of government administrations, bureaucrats, congresses, courts and wars on everything, the tyranny of fiat red tape, Barack Obama’s one month in office Nobel Peace Price nomination and award notwithstanding. He wants to share it with everyone. Maybe he could share it with Martin Armstrong, Dr Franz Pick, Col EC Harwood or Vern Myers, American political prisoners whose property was seized while they were held in jail indefinitely without due Constitutional process, some eventually plea-bargaining to get out as do 98.5% of people incarcerated by government. Harwood, Pick and Myers died while Martin Armstrong is held Fort Dix Prison Camp until 2012 smuggling economic truth out.
USA Courts have a 99% conviction rate. The USA has the highest percentage of people in prison in the world. 10% of the working age population are in jail, plus half the people work for or depend on an unproductive government.
People who consume but do not produce drive up the costs for everyone else.
Various commissions defined CPI down to reduce government COLA payments: Cost of Living Adjustments are as unrealistic as government savings bonds and TIPS: Treasury Inflation Protected Securities.
Real inflation which affects asset prices, is a credit condition.
Anyone can look at John William’s Shadowstats Chart of M-3 since 2008, read David Rosenberg’s Gluskin Sheff report of the $20 B reduction in consumer credit in August temporarily hidden by cash for clunkers, take a good look at GE Credit and GMAC DiTech 125% Loan to Value shadowbanks disappearing.
Or they can merely consider their own disappearing paycheck, home or mutual funds, to know which way the Arctic credit wind blows the economy.
In fact, divided by the eternal constant gold, we had -83% real declines in Real Estate since 2007, -83% declines in the dollar since 2001 and -84% real declines in the Dow since 1999.
It is not so much gold going up. Most assets are going down.
Central Banks are doing everything they can to prevent a bubble in gold, for it is the basis of all money, finance and trade.
Gold is a proxy for the real rate of interest that reflects increasing scarcity of capital as it flees for freedom.
At 1061.50, having quadrupled since 1999, gold is telling us real interest rates (deflation plus nominal rates) are the highest in history.
With high interest rates comes higher tax rates.
It is no accident Fed Usury and Income taxes came the same year to the home of the brave and land of the free in 1913 with a Princeton Academic President.
70% of Federal income taxes are paid by the working class.
There were no tax cuts for the middle class. then or now.
Now we have a Princeton Academic head of the Fed and a Princeton First lady.
The Fed took trillions from Americans by creating trillions out of thin air and government TALF, TARP and PPPIP programs to protect a failing banking system by purchasing toxic assets to bail out big bank members and their corporate friends like AIG, GM, FNM, FRE marking the end of the biggest inflation of corporate monopoly government in the history of the world.
We face the prospect not only of failing underfunded government agencies and programs like FDIC, OPIC, PBGC with an insolvent treasury, but a failing Fed, bailed out by foreign central banks like the BIS and the IMF, which happened in Revolutionary, Civil and World Wars with Panics and depressions.
To think the Fed is likely to inflate the money supply to Zimbabwean levels is to forget the inflated Treasury debt market is at least ten times the size of American equity markets. Equity does not drive the derivative markets, debt does. If real money supply inflates again, bondholders sell in droves, driving nominal interest rates to the sky to reflect gold prices.
Only Centennarians who were adults coping with the Great Depression may intuitively comprehend this.
Thus 1061.50 gold, which may be the highwater mark, reflects the failure of the Fed and Treasury to stabilize the economy against the Greatest Depression. Quadrupling gold prices are not inflationary, but deflationary, as compounding Treasury interest devours everything in its path like a Borg Cube Black Hole.
Treasury Interest is already the third largest budget item after transfer payments and the military industrial complex. In coming years, Treasury Interest may compound to number one, unless Treasuries default first.
None of this realpolitique finance is inflationary for college tuitions driven sky-high by student loans, defense budgets bloated by foreign conquests, dollar creation based on limited Treasury bonds, government subsidized healthcare or unfunded entitlements. Even ammo, food or guns may slow their appreciation for a time. People are most bullish at golden tops and most bearish at dollar bottoms.
Regards*Rich
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Thanks once again, Rich, for sharing your wisdom and your deep understanding of the global economic scene. If it’s okay with you, I’d like to feature this post as Commentary on the front page, since you’ve said it all better than I could have. RA
deflation first then inflation after 2012-2014..boom boom…parabolic. 9-10-15% interest rates by 2016.
Choose one market and make a killing. Trade commodities. Buy and hold is the biggest investing lie told to the public. I wonder how the Japanese fell about the Nikkie with the buy and hold. It is coming to America…the drop like Japan and the nasecent down sideways trend….but not now. I know when, and its no now like most people think.
Rick is good, but I much better with my predictions. I know the future and you could too if you look at all the right places and there are in all the true sources. Most if not all true sources have no websites, nor subscribers nor fans. They don’t want any.
But ‘SEEK and YOU shall find.” Look at the Bible it’s there, the new and old testament ( Torah), either one will do..as one is a image of the other this is a big hint, Socrates, Plato, thoreau, astrology, Gann. Gann best was never revealed, but all you need to know from him is “What has been we be again, there is nothing new under the sun.” You don’t need Gann to trade. His best idea was 50% like Pugh.
The best medicine is the Sun. Get enough of it WITHOUT PUTTING ANY SUNSCREEN ON and YOUR HEALTH will be fine. LISTEN to the pharmaceuticals and doctors and you will get more problems than you know. The Sun is a true source 100 millio years + old source. The American medical Association is only from the 1930’s and pharmaceuticals are only from the 1930’s. Natural medicine has been here since the greeks and mayans…..getting the picture I hope.
Like the H1N1 bullsh*t they telling and scaring all, just like the 911 crap. If you really believe the US is number one country in the world and it is…then this crash should have never happened.
But it was meant to happen for a reason…..as Roosevelt stated ” Whatever happens in the in State known beforehand by the state, for if it was not known, then the state is in danger.”
Federal Reserve Anniversary 2013 ( 1913 creation). They planning something for this one I know. Those banks that own the FED are waiting for this party.
So believe your government and perish. Rise up and prosper. It’s in all the old true sources.
And Remember, Capitalism left long, long, long time ago. Reagan brought the vestiges of Socialism/Marxism and its comes to full fruition with Obama. Of course you think Reagan was good…bah humbug. You just can’t see the lie.
Republicans/Democrats they all he same lie and YOU people NEVER GET IT. As long as these TWO fools are in YOU will always perish.
The only way to prosper is to use what THEY use on us….trading commodities.
Good luck
Les asked, “List one medical surgery that is cheaper now …”
Elective eye surgery (Lasik and others). These are typically not funded by insurance nor funded by gov’t medicare/medicaid so there is a more free market of competition. This has led to following prices and increased (quicker/safer) service for the patients. The free market can work, even in the medical surgery field, if gov’t would get out of the way.
Rick roughly said, Hyperinflation “would also wreck the institutional conduits of lending, including the bond and mortgage markets, for at least a generation.”
Did it play out this way in Germany after the WWII? Or did a new currency allow the lending markets to restart quicker than a generation (decades) of time?
“…falling home prices, falling wages, falling rents, falling consumer credit, falling bank lending, a devastating collapse in financial assets, massive cutbacks in state and local budgets, the absence of pricing power for most consumer goods, etc.. ”
That is what is happening at this moment. Does it look like stagflation? RA
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Most commodities were only higher for a few months during the 2007 bubble…. So you have the cost of all goods at a level that in 2004 we would have been AMAZED about…. really all at all time highs if you exclude the mountain top of mid-2007….
Inflation in the things you need +
Deflation in investments/things you don’t need
=
Stagflation
Joe 6-pack says:
“This morning when I put my 44 cent stamp on my mail and paid $2.50 a gallon for gasoline I didn’t feel things were getting cheaper. Thank god minimum wage is up another 20% this year…. Of course most of my car was bought for me by the government, along with $8,000 of my house. I don’t pay my mortgage but I am getting a “work out” program from Citigroup. If I lose my job I can draw unemployment for well over a year, maybe forever…. Thank god my 401K is up 60% from March, im mostly in solid financials like Bank of America. I hope I get another $600 check from Stimulus #2.”
Obviously the above is a joke, but my point is the government is plugging all the holes with trillions of dollars. I remember commenting out here back during the first 800 billion in stimulus saying, “you aint seen nothing yet”… well, you still aint seen nothing… Here comes cash for appliances, cash for dodads, unlimited unemployment benefits, $15,000 to buy a house (no restrictions)… and so forth… until it works or our dollar is worth nothing.
Maybe some more deflation in the short run, but don’t think for a minute that they will let deflation win… I always say “deflationists think the government will run out of zeros”.
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Government is plugging “all” the holes? Get real, TC. Doling out relative food stamps has not exactly stimulated a bidding war for homes in California, Nevada, Florida et al. If you inflationists would address the housing-market deflation more seriously — which is to say, address it at all — I would start taking you more seriously. Housing aside, another unplugged hole — not exactly a small one — is the worthless paper still sitting on banks’ books at par value. JP Morgan alone, whose stock has rallied maniacally, continues to hold derivatives with a notional value of $100 trillion. Every penny of it is of course “un-actualized” deflation, unless the Fed one day decides to “buy” it all up. That will bring on hyperinflation, yes, but until such time as it happens, the financial-asset side of the ledger will continue to exert black-hole deflationary force. RA
“Government is plugging “all” the holes? Get real, TC. Doling out relative food stamps has not exactly stimulated a bidding war for homes in California, Nevada, Florida et al. If you inflationists would address the housing-market deflation more seriously — which is to say, address it at all — I would start taking you more seriously. Housing aside, another unplugged hole — not exactly a small one — is the worthless paper still sitting on banks’ books at par value. JP Morgan alone, whose stock has rallied maniacally, continues to hold derivatives with a notional value of $100 trillion. Every penny of it is of course “un-actualized” deflation, unless the Fed one day decides to “buy” it all up. That will bring on hyperinflation, yes, but until such time as it happens, the financial-asset side of the ledger will continue to exert black-hole deflationary force. RA”
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If a tree falls in the forest does anyone hear it?
Of course you are correct about JP Morgan being bankrupt with worthless “level 3″ assets out the wazoo. But if they can just keep handing them over the Fed and keeping them off the books forever then WHEN does it exert a deflationary force?
In the short run (1-2 years) more deflation… in the long run the inflationist will win though…. at least you are a gold bug so you will win along with the inflationists.
You want me to address housing? Well the $15,000 “housing credit” bill in congress is gaining steam since the $8,000 “housing credit” bill did not work… can you guess what the bill will be if the $15,000 bill does not work? I say its the $30,000 “housing credit” bill. So forth and so on until prices stop falling. I agree that so far all they have done is stablize prices.
I think we are in agreement in the short term… I think deflation continues to rule for the next 1-2 years but eventually they are going to kill the currency. I think the next time they announce they are going to buy another trillion in quantiative easing that is when they will break the buck for good. (once the first trillion runs out)
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Concerning your housing bailout scenario, which I agree is plausible, your “and so forth” clause is not incidental to what could occur. Just as the Feds have shot $13 trillion already into stimulus and commitments that have achieved ZERO inflation, a substantial but too-slow ratcheting up of individual mortgage rescues could fail to rescue anyone. I also agree that a hyperinflation might be considered at that point, but it will be at a time when the financial pain of most households is at the threshold of statutory (i.e., bankruptcy) damage.
My main point is that hyperinflation cannot and will not simply “happen” — that it can only be triggered by an extremely drastic political decision that would effectively nuke creditors, savers and all institutional agents and conduits of lending. This would be a quite radical departure from the relatively huge stimulus that has been tried so far. That effort has implictly underscored Big Government’s faith in the ability of Big Banks to right the system. A shift toward a bailout of households would be tantamount to apostasy, since the government will effectively be giving up on the ability of The System to right itself.
I am sure inflationists and deflationists all agree that this “radical solution” would utimately solve nothing. Debtors would breathe a sigh or relief, but the next day they would face a world in which borrowing had become impossible. Our standard of living would collapse overnight and would remain so even as Asia returned to prosperity. RA
RA
The deflationary arguments are stupid.
Haven’t you read about WEIMAR????
Surely if hyperinflation has happened in Germany, then it can happen in the USA?
My guess as to what will happen:
- Essential everyday items will rise extremely significantly in price (70s or worse inflation).
- All items that were previously bought with loans (house, cars, etc) will drop in price (deflation).
- Other non essentials will probably have price rises as production drops.
Rick’s prediction of all round deflation is basically wrong in my opinion.
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Whom do you think you’re kidding? If you knew anything at all about “Weimar,” you wouldn’t come off like such an ignoramus in this forum — and you would begin to understand why a “Weimar” is as likely in the U.S. as a Martian invasion.
Here’s a link for you. I suggest that you read it, attempt to comprehend it, and then come back and tell us about “Weimar”:
http://mises.org/resources/4016
RA
>>Presumably he is one of the 96% of people, however, who are now bearish on the US dollar just at the point where it is actually about to take off. <<
Short-term, it probably will. Long-term, all the news I read point to a shift away from the USD as the world's global currency. How is that USD positive over the long-term?
The past year has seen a transfer of private debt from banks and GSEs to the government. The government already had and has a prodigious amount of debt of its own making. Deflation punishes debtors. Inflation relieves their burden. Why would anyone think that the government will not pursue inflation as a cure for our monstrous debt burden?
Socrates, why is it that people, um, oracles like you invariably display the written communication skills of a sub standard ninth grader, and a level of coherence reminiscent of a senior citizen well into their third lunch time martini? Please don’t answer in writing as I’m all out of Tylenol.
Hello Rick
I read most of the web page you linked to. It was a very long read! It provides a really detailed history of Weimar.
I fail to see how that web page shows that Weimar will not happen again. Please excuse my ignorance, but what exactly is the amazing feature of the USA that will prevent it suffering a Weimar episode?
Here is one quote: What really broke Germany was the constant taking of the soft political option in respect of money
That sounds familiar!
Large (or hyper) inflation occurs when producers believe the dollar is unreliable and worthless.
How much of the stuff you buy is actually made in America? What will happen when the Chinese decide they won’t accept payment in USD? There will be massive inflation. There will be flow on effects once the Chinese decide they don’t like the USD. Every other producer (including American producers) will NOT want to hold the USD as well. Farmers will refuse to sell their produce (like Weimar). Etc Etc. The value of the USD will plummet because no one wants to accept it!
The simple fact is one day manufacturers / producers will not accept payment in USD. It is not a question of if, but when, hyperinflation occurs.
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Have you really read the entire book? Perhaps you missed the section that discussed the issuance of scrip by large German employers during “emergency” periods, such as when the currency-printers went on strike. It was during these times that severe inflation was turbocharged to create hyperinflation. And you may have missed another section that talked about the mechanisms put into place to allow printing-press money to achieve its primary objective of full employment.
I suggest reading the book more closely, since every chapter reinforces the fact that Weimar Germany, and its mechanisms for effecting inflation, in no way resembled today’s USA. I haven’t said that hyperinflation is impossible — only that nothing tried so far, and nothing reportedly being contemplated, would even come remotely close to doing the job. If you trouble yourself to actually read the book, you’ll be among the very few who understand what actually occurred to put printing press money into the hands of the German people. The mechanism is not discussed explicitly in a million web pages that purport to cover the subject.
RA
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James- I agree in the long-term the USD is toast, but for the next year or so, I see it as gaining significant strength. Did you see what the USD did when stocks dropped between Aug 08- March 09- well the same is about to repeat, although on a bigger scale as stocks are on the verge of falling off a cliff as the next wave debt unwinding take hold. Most of that debt is payable in USD, making it a necessary “flight to USD”. Any Fed USD printing power is a drop in the ocean compared to the huge amounts of debt to be unwound, as Rick has tried to explain, negating any inflationary effect.
Anyone interested in the Elliott Wave picture I’d be happy to show where we currently stand (quite a turning point right now in all markets) (in my own view)- may be mumbo-jumbo to some, but beautifully distills down all the fundamental arguments into “a picture tells a thousand words!”
Part of the Credit Cardholders’ Bill of Rights Act signed by president Obama attempts to limit risk for individuals under age 21. To protect lenders, people under that age must have a co-signer involved in the credit or loan process, or the total amount borrowed cant be more than 20% of the individuals income. The main issue with using credit cards is the amount of interest that can add up over time, more education for students about the credit card cycle is needed, so that no one falls into a situation that requires bankruptcy.
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