On the Rick’s Picks web site yesterday, we featured a link to Mish Shedlock’s latest, lovely essay concerning deflation. We thought we could avoid getting drawn into the debate ourselves, but it was not to be: the topic touched off quite a firestorm in the forum that began with this introductory note on the home page:
“We stopped ‘debating’ the inflationists a while back simply because their arguments had become too bloody stupid to endure. Obviously, they have not been playing with a full deck, since they continue to obsess over the absolutely useless textbook definition of deflation – ‘a decrease in the money supply.’ Rather than have you become confused by all the drivel…concerning the money supply, which virtually no one [really] understands, we would rather that you see deflation for what it is [in our lives]: an increase in the real burden of debt.
“One of my ablest comrades-in-arms has been Mish Shedlock, a deflationist with more patience than I when it comes to dealing with the factually challenged. In his latest commentary, Mish mostly agrees with some points concerning deflation made by David Rosenberg, an economist who has earned our respect. Click here to access the article.”
Drudgery
We admit that it has become drudgery to parry the inflationists’ tired, old non-arguments. We’ve been writing about the subject since the mid-1990s, when there was no one to argue with. Back then, deflationists lay beyond the economic pale, and only two guys that we can recall even used the word: Ashby Bladen, a permabear who wrote for Forbes; and Bill Helming, an agricultural forecaster who was worried about Third World debt. We not only used the’D’ word at every opportunity, we asserted – in Barron’s and in the regular column we freelanced to the Sunday San Francisco Examiner – that deflation was absolutely unavoidable.
In 1999, two years after the collapse of the Thai baht, we were joined on the still-lunatic fringe by a couple of others. But it would be another seven years before the word “deflation” made it into a headline in the New York Times. Respectability at last.
But evidently not the fawning, universal appreciation we might have hoped for. Consider this post by “Ben” in the Rick’s Picks forum yesterday:
“Rick, you keep asking where are quadrillion dollar houses –as if that insulting and sarcastic comment lends any kind of support to your deflation theory. I would expect more of you. Obviously a lack of quadrillion dollar homes does not prove anything except the fact that the dollar has not yet been annihilated. And I don’t think anybody here believes a dollar is not worth picking up off the street, even if there are differences of opinion on whether and how soon we will see such a situation in the future.
“The Austrian economists put forward the concept that inflation is a monetary phenomenon. If inflation is measured by money printing we definitely have it. And if we look at the twelve trillion dollar non-GAAP U.S. debt, which is in addition to tens of trillions in unfunded liabilities, we will have lots of inflation in the future. What has stemmed most of this inflation from showing up as a rise in prices is probably the fact that for the past half a century, countries and people all over the world accumulated U.S. dollars as if they were gold. When this fallacy is realized, floods of dollars may flood into circulation from all over the world as the U.S. government does its own printing to cover its suffocating expenses.
“Back to the house analogy…I know in my area houses have gone up 2000% since 1980. While they may be no quadrillion, I see [sic?] plenty of inflation in houses.”
My response:
If you think I was trying to insult you, Ben, then you still don’t get it. You need to deal with the concept of a quadrillion dollar house, because that’s what it will take to pull 60 million (and growing) homeowners from the deflationary mire. Or do you perhaps believe the government can create just enough “controlled” inflation to float underwater mortgages to the surface without accidentally goosing prices into the ionosphere? With $13 trillion worth of taxpayer skin in the game already and no housing inflation in sight, some would argue that much bigger numbers are called for. And I suspect they’re right.
With all due respect, there is not enough substance in your post to warrant an argument. For instance, you say that “If inflation is measured by money printing we definitely have it.” Is that an argument? A statement of fact? Do you — does any inflationist? — even understand what “printing press money” is? Do the mountains of digital bailout dollars that the banks have socked away in Treasury paper count as “printing press money”? And if so, how will those digital dollars cause inflation? (Above, you flatly assert that debt itself will bring about inflation. Is this a lapse in syntax, or were you simply hoping no one would notice the mile-long gap in your argument?) And, will the banks make mortgage loans in an inflating market when they are not even willing to do so now, at the supposed rock bottom? In fact, bank lending is still contracting, and sharply. What do you foresee reversing this trend?
Where’s the Collateral?
Meanwhile, how many times do I need to repeat here that the only way to actualize all of the supposed printing press money is to get people to borrow it. (But what would they use for collateral? Their already over-hocked homes?). Or like most economists, do you perhaps think The Government can conquer deflation via massive deficit spending? If so, are you certain that Keynesian heroics will suffice to overcome the drag of a liquidity trap that has been suffocating the economy for nearly three years? I’d have thought the answer was too obvious by now to avoid. And would you — or Jim Rodgers, or Marc Faber, or for that matter any of the other grandees of inflationism — like to take on Antal Fekete’s deflationist argument concerning the marginal productivity of debt? Of course not, since it is miles beyond the reach of “the-Fed-won’t-let-it-happen” drivel.
And what about all of those hoarded dollars around the world that you mentioned? In fact, compared to a financial asset deflation aggregating into the many hundreds of trillions of dollars, the total number of physical dollars in vaults and mattresses barely registers on the scale. And so what if the price of houses in your area has risen by “2000 percent”? What on earth has that to do with today’s housing prices, or with the failure of unprecedented stimulus attempts to lift residential values more than an iota?
Nothing you guys have thrown at the wall has stuck. Have you anything to say besides, “Sooner or later, all of that printing press money is going to cause inflation.”? Please start by telling us why all of that printing press money has caused zero inflation so far. At the moment, with asset values (other than psychotically energized stocks), wages and bank lending contracting, the burden of proof most surely does not lie with the deflationists.
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Rick,
You mentioned Antal Fekete. I’m currently reading through his archives and highly recommend that everyone does the same as it will yield understanding of how a deflationary nightmare could unfold. I call myself an inflationist but see that the future holds both inflation and deflation. Gold (and possibly commodities) will rise as all currencies are floating (sinking) together. Not only do we have the U.S. dollar chasing gold but all fiat money worldwide. If the U.S. is undergoing chastisement from the hand of economic law then what would be more painful than a 70’s style stagflation? People are holding out hope that somehow they will escape the pain to come. Few will. Picture falling wages, falling housing, stagnant stocks, higher unemployment happening at the same time we are competing with the rest of the world for food, oil and gold. Does that make me an inflationist or deflationist?
I hate to bring up Weimar but it’s forgotten that housing and assets when priced in gold and food became virtually worthless. 90% of take home pay went for food. 5 ounces of gold would buy prime commercial real estate in Berlin. Admittedly, the war ravaged and many were fleeing so that may explain the disconnect.
Nobody knows what the future holds but in my hand I do hold gold. That we agree on. BTW, fine job with the website, you’ve been helpful.
I have a simple one question challenge for you Rick.
We can argue all about housing explaning everything but that is making an assumption on the order in which inflation will show up.
There was a nice recap of the inflationist/deflationist debate that was done on finanicialsense.com last weekend.
http://www.financialsense.com/fsn/main.html
Of Oct 3rd – 3 hour
One question they were asking the deflationist:
Name one country in the whole history of the world, which was a debtor nation, NOT a creditor nation (like Japan in the 1990), AND that was on a fiat money system that did NOT get into hyperinflation.
No answer.
If you say south sea bubble, or US in the 1930s or UK in earlier time- they all got back to gold and hence got into deflation. Beside US was a creditor nation in the 1930s (as was relatively still the case in the 1970s)
With no manufacturing base (all left overseas mainly), trade deficit with the rest of the world, debtor nation – and all those future debts (soc sec, medicare, etc) – the only way out for politicians – since they all think about deflations right now – is to print their way out – we can afford to do so because the deflationist are not seeing any chances of hyperinflation.
Wasn’t Germany in 1920 in debt for war repayment?
So, here is my simple question challenge:
I’m asking you, which debtor nation country in the past got deflation on a fiat money system (and stays on it) ?
And yes, priced in gold, we will have major deflation, not in $
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For starters, Phil, there was Russia. But why argue about such irrelevancies, since history never repeats in a way that fully prepares us for the future? And anyway, I have already endorsed Peter Schiff’s hyperinflation scenario and believe that we will eventually see a blitzkrieg hyperinflation (detumescing just as quickly, of course, into a deflationary depression). That leaves only one question of importance: How long will deflation persist before debtors are all “emancipated”? Inflationists never seem to consider that this will be a pretty big deal, since it will destroy savers as a class and wreck all of the institutional conduits of credit — including the bond markets — for perhaps a generation. Housing deflation is important, and I keep hammering it as a theme, because it is where the rubber meets the road for an America irredeemably in hock. Will hyperinflation (and you’d better believe that no mere inflation will do the job) come in time to “bail out” homeowners? I don’t think so, since all of the supposedly heroic stimulus that has been attempted so far was shot at the banks, who are not lending the ostensible surplus. Promoting a hyperinflation may require an “assist” that transcends even Schiff’s (and Egon von Greyerz’s) monetization — may require nothing less than the addition of three or four zeros to everyone’s bank account. Do you see that as possible, let alone likely? I’m not so sure myself.
If you delve deeply into the details of the Weimar hyperinflation of 1921-22 — check out the fascinating book on this topic at Mises Institute’s web site — it explains what the inflationist never bother to address: How did all of that printing press money get into the system? The answer will surprise you, and the mechanism bears no resemblance whatsoever to the would-be inflationary nostrums that have been tried so far, or that are perhaps being considered, in the U.S. In fact, the Weimar hyperinflation occurred in spurts, with much help from big employers who had been enabled by statute to issue their own scrip during currency “emergencies” (such as when the German government’s money-printers went on strike). Another amazing thing about the Weimar hyperinflation is that even as it was occurring, there were economists and high-level policy makers who insisted that it was unrelated to the Reich marks that were then rolling off the printing presses by the gazillions.
The Mises book should be required reading for anyone who wants to join in this debate — especially know-nothing inflationists who persist in talking about “printing-press money” without understanding what it is.
RA
I lived in Zimbabwe so I have seen inflation go from 1-2% to a million % very quickly. Currency devaluation brings on inflation.
the inflation vs deflation debate is a totally moot point for me. the question investors are faced with and the one that has the most consequence for them is how to handle cash. cash has no yield in a QE environment and with a $ that is weakening against all currencies and especially against gold, cash looks like the riskiest place to be now.
what holders of $ are facing is currency devaluation. regardless of I or D, life in a $ based economy will cost more because our trading partners don’t want $. to me, it looks like all roads lead to gold,
thoughts?
Rick,
two questions:
a) “the only way to actualize all of the supposed printing press money is to get people to borrow it.
How was the (hyper)-inflationary money of 1919-1923 Weimar Germany swet into the system/economy? It definitely was not by regular people borrowing, I have never read anywhere of that happening. Back then, very few people owned real estate/assets and did not have potential collateral anyway. Somehow though, without borrowing, the paper did find its way into the ssystem.
b) What is the mechanism/argument for an asset class such as the PMs to appreciate in value relative to “money” when that money itself will be appreciating (=deflation)? Is it that everything else deflates save for this asset class?
If not, why bother with gold at these levels? Even if gold were to decline less than these other asset classes, while still declining vs. money, why go there now rather than just holding paper?
I could see two answers:
1] an expected collapse of the currency system whether in a de- or in-flationary environment, or
2) or is it actually that, as Gary North has also pointed out, that gold IS money? If so, then perhaps the metal form of money will simply be priced higher than the paper form, with both appreciating rel. to everything else?
I am not taking sides either way in the debate, don’t know enough for that, but wanted your feedback on these issues.
Thanks!
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See my response below to Phil’s query, Chris.
Regarding gold, I continue to see it as a winner regardless of whether we have hyperinflation, deflation, or as seems most likely, both. But I have written about the problem gold hoarders will face when they sell god to buy necessities. Paradigmatically, it is a question of buying acres of farmland when gold spikes for, oh, three hours, to $5000 an ounce. Incidentally, German farmers who borrowed to buy property before hyperinflation accelerated in 1922 made out extremely well, since the value of the produce they grew held constant. Many were able to pay off their mortgages within a couple of years.
RA
Dear Rick
Thank you for clarifying your deflation argument. I was impressed and informed by it.
I am an avid reader of yours and of Mr Shedlock and Professor Fekete. I also suscribe to Mr Willie’s site. He has great admiration for you I believe.
I must agree, the weight of debt does it for me.
I don’t think for a moment the World economy is going to be anything but on it’s knees for
the forseeable future.
I hold Gold for the reason that I fear a sharp devaluation of GBP (I am British) …. another good old fashioned sterling crisis, in other words . In such circumstances prices may seem to rise but
it is surely the value of the currency that diminshes.
As far as I know in the last sterling crises property prices fell sharply as economic activity ground to a halt
I also remember too well the narrowly averted run on British banks only this time last year.
I am quite sure I do not want to loan my money to bad banks or for them to lend it
out to equally poor risks.
I am hoping that if I hang on to my cash in this way, I shall be able to buy more with it
in due course. In other words – hang the lost deposit interest and safe custody costs.
Not being a professional like yourself, I hope I have got this right.
Thank you anyway for your excellent efforts to cast light on the subject.
I am afraid I am not a suscriber as I haven’t been tempted to trade as you do. I am afraid
I must leave that someone of your professional capacity and obvious talents.
Thank you all the same.
Yours
Jennifer Heaven
England
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And thank you, Jennifer, for sharing your well-honed observations with Rick’s Picks readers. RA
There is only one inflationist argument, and that is that in a global fiat currency regime, there is no limit to currency (won’t call it money) creation and therefore any amount of debt can and will be monetized in order to avoid a debt deflation and global depression.
It seems the deflationary counter argument to that is that what we now call money is based on debt and therefore, increasing the money supply is just adding more debt. At some point, which may already be passed the interest burden of all the debt outweighs any gains in economic growth (if there are any) that can be attained through adding to total debt by monetization.
I’m not sure, but I think the latter argument is unassailable and the only question is whether we really have reached the end game or whether any more rounds of reflation might still work.
Then again as I’m thinking here, I wonder whether central bank insolvency matters. It would seem to in a system such as our Federal Reserve where the central bank is a consortium of private institutions, but I’m not sure how other central banks operate. Is it possible for governments to issue legal tender currency that entails no actual liability on the part of the central bank? or since the paper currency is only redeemable for more papaer currency is it only actually theoretically a liability? Perhaps such faux liabilities can be piled on ad infinitum, though it would seem a hyper inflation would occur at some point, but…
I just don’t know, so I remain a fence sitter. There are people much smarter and more knowlegable I am on either side of this debate. I don’t think either side are yo yos or knuckleheads, just people taking a crack at dismal science.
Rick, house prices while down maybe 20% in the past couple years, are still up hundreds of percent over the past couple decades. Gold has just hit an all-time high. And stocks are at or near all time high P/Es, and about as overpriced as I’ve ever seen them (Year 2000 included).
I think of inflation in terms of prices, whether actual price increases, or potential price increases caused by money created but “stuffed in vaults” and in limited circulation. In answer to your question about whether I had a lapse of syntax when I said government debt is inflationary…I did not. My implication was that the government would create ever more money to fund its own debt and liabilities.
I apologize for asking, because I’m sure you already said it and I missed it…but how do you define “deflation”?
It’s not just about money supply. A negative interest rate, for example, could cause inflation. How? Suddenly everyone would be anxious to unload their dollars andconvert them into assets that aren’t devaluing over time. This would cause a huge increase in money velocity which would be highly inflationary. The one caveat here is that the fed has great control over interest rates and can adjust them at will. All of those dollars sloshing around the economy would send prices for hard assets upward.
Rick,
Are we really in a deflationary mode? Great. I want to buy a nice house for $15,000 like we could back in 1970. This was just before the U.S. went off the gold standard. But the exact same house today is $250,000. How long will I have to wait for it to fall to $15,000? Or how about a fully loaded Corvette for $4500? I really want to buy a bag of groceries for $5 like my parents did. How long will that take? This deflation idea of yours sounds great. I can’t wait to put some purchasing power back into my dollar.
Dusty
P.S. You don’t really think the inflation figures the gov’t releases are accurate, do you? If so, I’ve got a bridge I’d like to sell you.
Rick,
I’ll take a stab at explaining inflation (lets see if this sticks
Rising prices aren’t the only way inflation can manifest itself. If prices are stable, due to quantitative easing, when they otherwise would have fallen, we have inflation.
The late ’20s are a good example of this. Productivity gains kept prices from rising despite all the money they were shoveling. Today the situation is different in that we’re in the bust phase of the boom/bust cycle. Our stable prices are being maintained in the face of a contracting economy by, you guessed it, shoveling that money out:
(snip)
Prices Should Be Falling
As industrial processes and productivity improve, prices should decrease. In fact, the increasing productivity of the 1980s contributed to the lower rate of price inflation. Decreasing prices improve everybody’s living standard. That is the benefit of an advanced economy: higher production of better products available to more people at lower prices. If prices do not decrease because of inflation, then the benefits of productivity increases are not shared. By gerrymandering the CPI and pursuing “price stability,” the government obfuscates this fact.
During the past three years, by purchasing Treasury securities, the Federal Reserve has monetized government debt at a high rate, and the most basic measurement of money supply, M 1, has increased 37 percent and currency has increased 27 percent. That this has not been reflected in price inflation is due only to the flawed definition of price inflation and the fact that vast amounts have diverted to foreign countries. Inflation is a worldwide phenomenon and has been understated all over the planet. Perhaps long-term interest rates haven’t dropped that much for good reason.
http://www.thefreemanonline.org/columns/money-and-inflation/
Rick,
I would love to see some deflation in the IYR, RTH, XLB etc.
If those market sectors are not INFLATED I’ll eat my shorts!
rick
and you increased your prices last year due to deflation lol
to meet higher prices… i suspect that we will see your cost coming down to run the seminars
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Nice try, Bill, but my prices have not changed since Rick’s Pick’s was first published nearly six years ago. The Hidden Pivot seminar price has come down some, but only because I have been able to streamline the presentation online. RA
This is getting hilarious…
Question: When was the last time you saw/read/heard Jim Sinclair, Peter Schiff or Jim Willie take a personal swipe at:
- Mish Shedlock
- Karl Denninger
- Rick Ackerman
Takers?
I find it most instructive and enlightening, that those who’s confidence is so secure with a particular belief, find it necessary to be the ones who sling the pejoratives first. When one is confident in their position, taking swipes at others with opposite views does little to bolster their argument. In fact, I would argue (by way of the recent sh!t-slinging contest between former (?) Deflationary brothers-in-arms) Shedlock and Denninger, over fractional reserve banking legality, that the finger-pointing – nay, naked arrogance, has come back to pay them a visit…
Mike Shedlock’s site has become a daily ‘defense’ of ‘Deflationary’ theory. Every single day there is an article gleaned from various sources – along with commentary, designed to augment/bolster his argument for a ‘Japan-like’ deflationary outcome for the U.S. Then again, when the company you represent is long the $USD and long $US treasuries, I guess that should be expected. Karl Denninger? No comment…
It would be nice to either elevate this or drop it. Unfortunately, the desire to prove one’s theory as correct, often trumps decency.
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You ought to read Mish more closely, CC, since observable events in the real world are helping him win all the arguments that you would speak of so dismissively.
I don’t know Jim Sinclair, but I respect and admire him. Jim Willie and I have our disagreements, but we go back a ways together, having found common roots in the writings of Richebacher. As for Peter Schiff, you ought to read ME more closely, because I have made perfectly clear that I think his hyperinflation scenario is entirely plausible. RA
Dusty,
You can buy a bag of groceries for $5 like your parents did. You just have to use pre-1964 silver coins. They are worth over 12x face value now.
Regarding the inflation/deflation debate, Jesse had a good essay on the subject.
http://jessescrossroadscafe.blogspot.com/2009/09/confessions-of-flationary-agnostic.html
I would ask Rick (and Mish): what will happen to prices in USD terms in the event of a currency collapse? What happens if we have a “Sudden Stop” event and foreigners stop financing our debt?
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The mere fact of foreigners ceasing to buy our debt will not create hyperinflation, James, but Schiff’s scenario might come into play not long thereafter. He sees a day when the Fed is forced to defend Treasurys, only to discover that virtually all other bond markets will collapse when they see they are not being “saved” as well. This will force the Fed to purchase munis, corporates, and all other types of debt. THAT is how hyperinflation could occur via monetization. But the catastrophe could be so fleeting that you might need to implement “Contingency Plan #2: Deflation,” in a matter of days. RA
Rick
I think you are involved in a silly debate that misses the relevant point. All anyone should care about is the value of their individual purchasing power in terms of the medium of exchange being used where they live and that they use.
It is obvious that supply and demand still also play a major roll and that prices of many large ticket items are affected by gov’t intervention (Think home buyer credits and clunkers)
When a currency such as the US currency is falling in value (even if it is just an arbitrary reaction to US policies by foreigners) as it is now, prices of many things have to increase as merchents in the foreign contries that produce most of our goods will want more dollars for their products and so prices of many goods will rise and normally this is called inflation.
On the other hand many items have no real demand and consequently no buyers equals declining prices. This is especially true for homes, cars and big ticket items, so prices have to be reduced if sellers want to sell their products and this is the basis for the deflation you continue to preach.
It is obvious to me that we can have both inflation and deflation at the same time so no one should just be taking one side of the argument exclusively. However, if you know of places that are exclusively locked into deflation I will be glad to let you do my shopping for me as I keep seeing increased prices (or smaller packages) on many items.
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Ace, let me repeat this for the zillionth time: What matters most is how the real burden of debt evolves. RA
It feels like there’s 40 people trying to communicate here in 40 different languages. Without defining inflation and deflation, there really can be no meaningful discussion.
It is uncontestable that gold is currently at its all time high in dollar terms. Stocks, bonds, houses, and almost everything else are below their highs, but way above their lows. If you define I/D in terms of prices in dollars, what does it mean when some things are shooting up and others are tanking? If the price of everything in terms of gold is falling, is that inflation or deflation? And if you define I/D in some other way other than prices, what is that definition?
Rick, you keep practically equating debt with deflation…but Weimar Germany and Zimbabwe were overburdened with debt. Shall we say that they experienced deflationary busts because the prices of everything in terms of gold collapsed?
JIm Willie has said a number of things about Karl Denninger that were borderline ad hominems. Karl Denninger went right over the border in his attacks on Jim Willie.
I am not an economist so I don’t pretend to know about inflation or deflation (I have never understood the definition of either ) and I don’t care . I simply would like to understand whats going to happen in order to plan my future . Both sides argue their point in convincing fashion , however one is right and one is wrong ( or could it be that both are correct).I would suggest comparing ,in economic terms the hyper-inflation of the Weimar republic , the inflation of the early 80’s and the deflation of the 30’s depression and relate that to todays circumstances .Is there anyone who can be ojective enough to do this exercise .
Rick,
thanks for taking all the time to read and reply here, as that is no little thing.
Good too for pointing out the Weimar situation with respect to emergency money (a few pieces of which I own in private paper, ceramics, etc and all much nicer than the “real thing”).
Still at a loss as to the actual mechanism of how (why) the dollar will depreciate (=inflate) vs gold, when the dollar is appreciating (=deflating) generally?
The gold-going-up-during-inflation mechanism/argument seems so logical, that its opposite would seem to have to hold during deflation.
Savers wouldn’t mind an appreciation of purchasing power, but they would mind a gold-goind-down-during-deflation.
It would be nice if one could be confident in a gold-doing-well in deflation logic, but I haven’t come to understand how that works — BUT I sure would like to take a pocketful of gold to buy that CPW condo (you mentioned some time ago)!
” When I look back on all the crap I learned in High School, it’s a wonder I can think at all. Although my lack of education hasn’t hurt me none, I can read the writing on the Wall.” – Paul Simon
When I look back on all the crap I’ve read on websites… (’second verse, same as the first.’ – Herman’s Hermits)
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You ought to try focusing on just the good stuff, Terry. RA
Where is the inflation? Where is the deflation I say. Inflationists arguements are lame? Deflationists claim are insane I say. Inlation IS expansion of the money supply. That has happened. Inflation in real goods is rampade; food, insurance premiums, medical, labour charges, bank charges, public interest rates in credit cards, fuel, anything oil based, etc. Asset prices are declining but why so slow? Because inflation is holding those prices up.
The money being created is not being spent but hoarded and not entering the real economy. That statement is ludicrous! Of course it is being spent, not on goods but on capital replacement. If that money had not been created and given to banks trillions of dollars of debt and deposits would have been wiped out. THAT would have been a huge monatary contraction and your deflation would have come AKA 1930′S but nay, that never happened.
What is happening, and this is the worst happening, the money creation is being used to prop up a failed economy, failed institions, and failed policies. The lag effect will be dollar devaluation. This is happening, not deflation. Dollar devaluation via dilution will continue and accelerate until confidence is lost and hyperinflation ensues. This has happened as recently Zimbabawa. It has happened many other times Argentina, Germany, US Civil War, etc.We are on this path because we are creating 90 billion a month to prop this country’s economy as shown in the counry’s debt. That it is not being spent into the economy is why your deflation in certain assets is occuring but slowly, but currency devaluation is occuring as well and that is inflationary. Show me one country where currency devaluation led to deflation. Good luck.
Soooooo Rick, although Mish, yourself, and other deflationishs may point out selective assets which are deflating, REAL deflation like 1930 is nowhere to be found because everything monatarally happening is inflationary and slowing down or stopping real deflation from occurring. Bernanke has said, he will print money to stop deflation and he succeeded by about 80% and he knows that if he keeps printing the dollar it will fall eventually and goods and asset prices will rise by default. He will get his inflation.
Either the banks loan the money out to the money into circulation to produce the inflation he wants or he devalues the money itself to increase the cost to produce, import, and buy the finish goods. Anytime the government intervenes monatarily to stop deflation it is inflationary IE The New Deal. You have no examples to the contary. That real deflation is not occuring across the board says you are wrong and proves I’m right. Selective deflationary deflation, give me a break.
The only times which such inflationary events has produced deflation is when those countries went back on a gold standard, which basically is a contraction of the money supply and I admit will be deflationary.
Since you were blunt so shall I be, back to school Rick on this subject.
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Kevin: Perhaps you missed this the first hundred times I repeated it, so let me do so again: Deflation will be felt chiefly as an increase in the real burden of debt. Too complicated for you to understand? Then you must not have a mortgage. RA
You say deflation, I say inflation, which reminds me of this little diddly…
You like potato and I like potaeto,
You like tomato and I like tomaeto;
Potato, potaeto, tomato, tomaeto!
Let’s call the whole thing off!
(Complements of George Gershwin)
I think the case of inflation vs deflation is all relative to what you are comparing it to. Let’s make gold the constant in this argument. The other two variables are the U.S.$ and property (housing).
a) In an inflationary environment, what will change in value faster relative to gold? The U.S$ or housing? And in which direction?
b) In a deflationary environment, what will change in value faster relative to gold? The U.S$ or housing? And in which direction?
I think everyone is missing the primary point here. How do you make money from this upcoming catastrophe regardless of whether it is inflation or deflation?
Dusty
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Another thing I’ve repeated a hundred times, but here it is yet again: You DON’T make money in a deflation. If you are very, very smart, you may come out of it — and perhaps a hyperinflation along the way — with most of your net worth intact. So far, even Warren Buffett seems to be stumbling relative to this goal. RA
It’s the Gold Sellers conspiratorial acts to create panic and fear so they can sell gold and gold or silver related paper products in the inflated prices.
I’m very suspicious of them. Look, if Gold will go up to $2,000 – 3,000 in year and half time, why do I want to sell my gold to you now? I would sell it later @ $3,000. Unless if I’m short in cash which is the paper fiat money.
“You DON’T make money in a deflation. If you are very, very smart, you may come out of it with most of your net worth intact.”
I agree with the “don’t make” point, and one should not angle for that, but, if one has money, one’s wealth goes up, because that same money buys more. (if one has negative amounts, ie debt, then of course they’re scr**’d, as you point out).
Two examples from our past, the first the better:because of duration.
1) In the only truly prolonged deflation we have had, the 30 years at the end of the 19th century, after going back on the gold standard post Civil War, prices declined by about 70%, what took about $1 to buy at the beginning of that period could be had for about $0.30 at the end.
Anybody who held on to money, savers (in paper or gold, they were the same then), had their wealth increase, even if they were not making any additional money..
One would think that it almost didn’t matter whether one had gold or paper money, but it’s probably a big “almost”
2) During the deflation in the early years of the 1930’s, the Union Club of NYC built one of the most luxurious clubhouses to be found anywhere. Even with some of their wealthy and very, very smart members (who, like Joseph Kennedy and Bernard Baruch [two of the utra smartest, and neither of whom probably could have been members in the discrimination of the day], did come out intact), , the only reason they could afford to build on such a lavish scale, was because of the deflation in labor and materials prices extant then. Thus, the club’s wealth had increased, to be spent into lavish real-estate consumption.
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Thanks for your observations, Chris. I’ve mentioned a couple of times that Joe Paulson might be the only billionaire who got there by betting on deflation. Using a sophisticated strategy, he shorted mortgage securities and made a bundle. But by the time the Wall Street Journal featured his exploits on the front page, there was nothing else for the likes of Soros to short. And now, the only asset class that looks fat and juicy is the bank stocks. Go ahead and make their day, right?
Regarding the Union Club, thanks for the interesting historical tidbit. I attend the CMRE (Committee for Monetary Research & Edcuation) dinner there every spring, and have always been impressed with its old-money redolence. Cell phones are banned, which makes the place seem all the more like a delightful dinosaur.
RA
You are all correct. It’s simple: Deflation impacts (or soon will impact) the assets you own. Inflation impacts (or soon will impact) the goods and services you buy.
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Shanti…shanti…shanti. Go in peace, my son. RA
I’m no expert but it seems to me very obvious what is happening and what is going to happen. There is certainly not going to be demand pull inflation that much is clear. However most cases if not all of inflation come from cost push, ie currencies losing their purchasing power.
Look at it very simply. I you or I Rick went to Zimbabwe and tried to buy a loaf of bread, if there was one to buy, it wouldn’t be expensive to us. We would change your Dollar or in my case my GBP and get 10 quadrilion Z dollars and buy the loaf. Easy – no pain there.
So when the GBP and the dollar eventually collapse, which in the case of the GBP seems very soon, things to us in the UK are going to get very expensive. Like the US we import virtually everything and since the GBP has collapsed by about 50% against every decent currency, we are going to get some wicked inflation. Its already happening, everything imported from europe is now costing us in the UK about 40% more from a year ago. Even basket case Spanish property is now 30% MORE expensive to us in the UK.
Now I know that you think that 300 million Americans are the world’s only possible consumers, so if the world can’t sell to the US it cant survive. BUT this is living in the past. We in the UK and you in the US were wealthy, because of teh relative purhasing power of our currencies, but that is about to be turned on its head. About 5 times as many Asians are about to get sucked up into the consumer class as they revalue their currencies and at the same time we trash ours. Suddenly the world doesn’t need us any more, and certainly not our worthless money. By revaluing their own currencies they can buy their own goods. All the Porsche motor cars will go to eager Asians.
How long did you think that 300 million americans could go on consumimg 30% of the world’s goods, but be a few percent of the population? The same will happen with oil, at exactly the same time as it gets too expensive for us, it will be cheap for them, the demand will shift, not go away.
The US got rich by doing exactly what the Asians are doing today, saving and production. Now its their turn.
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See archived article by Steve Puetz. It explains why hyperinflations happen only in currency-driven economies, not in credit-based systems. RA
Rick
With respect I don’t need to look up an article to see what is happening in real life, like right now. As far as I am concerned inflation to me means things are getting more expensive, for me. I don’t need the internet and economists arguements to see that real things like tomatoes from Europe, or holidays in Spain have just got 40% more expensive for me, now , in real life. As the GBP keeps falling its going to go on getting more expensive, imagine if I now wanted to buy a house or even go on holiday to Australia. Americans and the British would have a heart attack, everything has just gone up by 100%.
Its probably a good job that most Americans don’t get out of their country a lot. If they did they might see what was happening. I think if you feel international goods are going to stay cheap, jsut because Americans are broke, you have a big shock coming.
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That pretty much sums it up: I absoutely DO think things are going top stay cheap just because Americans (and the non-Asian world) are broke. I have written on this under the heading ” ‘Why Inflation’ Has Become Deflationary”. If the price of gas were to rise to $10 a gallon here, that would not be even the least bit inflationary because Americans would have to cut back somewhere else. If you can rebut this idea, you’ll be the first. How can consumer inflation occur when wages are falling and borrowing has become more difficult? RA
I think because Americans like the British are so reliant on imports. The price of oil will works its way into everything, after all most things require plastic and transportation. Consumer goods are going to go thru the roof, and it won’t matter if Americans buy them or not, as the demand will shift to those countries that have purchasing power. A Porsche will cost 500,000 dollars after the exchange rate, but it won’t have gone up for Asians, it will have gone down in price. You say how many Porsche cars will sell in the US at that price, probably none, it won;t matter. Like the UK, the US will become increasingly irrelevant as currencies around the world are revalued.
Obviously local products and services are not going to get Hyperinflationary, its difficult to imagine a haircut getting to be 1000 dollars, or I agree local housing to 100 million or whatever. BUT since the US imports so much, everything it imports is going to go through the roof in dollar terms, that seems a given. That means that an awful lot is going to get very expensive, until the US does what it needed to do years ago and starts producing stuff again. Its got nothing to do with local wages falling and no credit availability, it won;t change the fact that prices will be very high in dollar terms, despite no demand. The demand will have gone somewhere else. I know this is hard for Americans to understand, since like us you have been teh centre of teh universe for so long.
Atleast this is my best guess, so to answer your question prices will be high despite I agree no demand (no credit, wages too low etc) because of the reliance on imports.
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How can prices stay high with “no demand”? RA
“A loaf of bread cost a gold coin?” Not ever in the USA! Why I’m not so gloomy about the USA because USA is not Africa. USA is still at it’s worst now:
1) Greatest in Agriculture of the world (One America farmer feed 40+ people)
2) leading in Pharmacology healthcare industry
3) leading in aerospace technology
4) leading in computer information and communication technology
5) leading in defense industry
6) still leading in energy development
7) still leading in engineering machinery.
What’s lost are the consumer goods industry, auto industry and …… (? ) US will have the change to get over it if people get their act TOGETHER. The problem is the Americans are not together. The Chinese are.
p..s 1 No one will dump the dollar yet not for a quite a while. Don’t be stupid. And the Asians are not that stupid. On the world leaders meeting they were talking about coordination and make it slow and easy transition. Anyone does something stupid rack the harmony will get everyone cooked in the world. No one will be one piece left at the end if they do that. The purpose of G20 G8, or G7 etc is just that make sure everyone in the same pace. I think.
p.s. 2 Most Americans should do themselves a favor eat less because they are the fattest people in the earth. By eating less, they will not only have lots of food for the starved people in poor countries, they will also become healthier and therefore, reduce their healthcare costs.
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Thanks for the reminder that America is not exactly dead in the water. But we will definitely struggle with extremely high structural unemployment until wages adjust and financial deleveraging is absorbed by the system. RA
In the U.S. there are more people working in the 3 levels of government than in all of manufacturing. The trade imbalance is huge. This is not a sign of a healthy economy. The gov’t needs to downsize dramatically and get people to actually produce something that other countries want. When the U.S. dollar drops in value, imports will be too expensive so manufacturing will have to start up again.
>>p..s 1 No one will dump the dollar yet not for a quite a while. Don’t be stupid. And the Asians are not that stupid.<<
That's why Asia is switching from the U.S. dollar for international trade. They are gradually getting away from the U.S. dollar. China is also on a buying spree for natural resources so they can spend their U.S. dollar while it is still worth something. Asia realizes they will never be paid back for all of the U.S. debt they have collected. They will gradually dump it on the market so they don't cause a panic. They won't be buying more U.S. debt in the mean time which means the Fed will be buying up the treasuries using tax payer's money. There is a hidden taxation in this country and it is called inflation. Get used to it. It's going to be here for a while.
Dusty
One word only will suffice to clear the world-wide debt being created by governments and individuals: Repudiation. (Katy, bar the door!)
It seems that the dollar is little more than an electronic image that is shown on a computer screen or occasionally on a piece of paper. I have not heard what happened to the $9 trillion the Fed “lost”. Did they simply hit the delete button? What a great idea. Let’s all hit the delete button and start over again. Real assets such as water, food, clothing, housing, farms, etc. will always have value, while some other assets such as stocks and bonds will always go to zero.
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