Deflation

[With unemployment above 9% and productive capacity heavily underutilized, the U.S. economy is slipping back into official recession. In a letter to clients, our friend and financial advisor Doug Behnfield has predicted that deflation is about to return with a vengeance -- presumably with bullish implications for high-quality bonds and, get this… municipal bonds. For Doug’s take on the stock market, fixed-income securities and a Baby Boomer cohort that is ill-prepared financially for retirement, read on. RA] Over the last few weeks, stock, bond and commodity markets appear to have played "catch up" to fundamental economic changes that began early in the first quarter. In early February, 30-Year Treasury Bond yields peaked at 4.8% and started down sharply as bond prices rose. The municipal bond market did the same. The S&P 500 hit 1300 and essentially stopped rising, creating a volatile topping process that lasted until late July. Since then, the bottom has been dropping out of both stock prices and bond yields. The Fed has promised to keep very short term interest rates at 0% for at least the next two years. The economy now appears to have rolled over early in the year. Employment and housing prices peaked in the first quarter and GDP growth was revised down to 0.4%. At year end 2010, Q1 2011 GDP growth was widely expected to exceed 3.5%. State and local governments began aggressively tightening their budgets and it seems clear that the federal government will be doing the same. Standard & Poor's (and the other rating agencies to a lesser degree) have put congress and the administration on notice that the debt bomb must be defused immediately and the vast majority of voters seem to agree. The fiscal drag could be enormous. Or we become a Banana Republic. The median age of

An interesting day, for sure. But a surprise?  It shouldn’t have been, since even the Guvvamint’s statisticians and spinmeisters seem to have noticed that The Great Recession is back with a vengeance. Under the circumstances, anyone so stupid as to be loaded to the gills with stocks deserved the full brunt of yesterday's devastation.  The stock market’s collapse surely didn’t take us by surprise. The night before, under the headline “This Rally Is….Doomed!” we’d disseminated the following alert to subscribers: “The strong bounce off yesterday’s apparently oversold low is a fraud, and it is doomed, so we’ll have a very strong incentive to short every… rally target we can find…”  We’d also made the following declaration in commentary published here yesterday:  “Lest any of our own readers be shrouded by the fog of the Mainstream Media’s coverage of the financial markets and global economy, we’ll state for the record that the technical evidence is overwhelming that the Mother of All Bear Rallies begun in March of 2009 is over.” If we sound pleased that the market appears, finally, to be having a massive heart attack, it’s because stocks for too long have been the captive of quasi-criminal forces that could charitably be described as pond scum.  The good news is that when the Dow is trading 10,000 points lower in a few years, no longer doing the bidding of high-frequency traders, mountebanks, thimble-riggers, Murphy men and arse bandits, that will set the stage for a true bull market that will run for a generation. At that point, with “money” no longer available interest-free and in practically unlimited quantities for rampant speculation, stocks will rise once again on their individual merits, savings will have a purpose, and capital will seek out its most productive uses. We hope we’re around when all

[Our good friend Doug Behnfield – by far the savviest financial advisor we know -- was hard at work Sunday, prepping an ultra-rare 1972 Citroen he’s restoring for a $10,000 paint job in Florida. He had just fixed the air conditioner in his wife’s Cayenne – a day’s work that would have cost him $1,200 if the Boulder Porsche dealership had done it. He had also just put the finishing touches on the essay below.  It explains why America is in for some very hard times as we work off debts that have been accumulating for decades.  Doug is no pessimist, however.  Far from it.  He says that although we face a deflationary depression that will exact big sacrifices from all of us, America will be better for it, able to return to the core strengths that made the country great. RA] Genius survives the test of time. Beethoven, the Beatles. The Brothers Grimm, Hans Christian Anderson. T. Rowe Price, Bob Farrell. Stan Salvigsen and David Rosenberg.  The Pied Piper by the Brothers Grimm describes the consequences of stiffing the creditor -- in this case the rat exterminator paid in florins -- after a job well done. The Village of Hamelin loses all of her children (except for the crippled boy who can’t keep up) when the piper lures them to a cave that is sealed up by an avalanche. Grim indeed. Today our Nation is facing the mother of all due bills now that we’ve had our heads extricated from the sand by the Tea Party. Congress and the President have settled on a fiscal restructuring plan that calls for $2.4 trillion in savings over the next decade, an increase in the debt ceiling and the creation of a congressional committee to recommend long-term fiscal reforms. The legislation acknowledges

[Guest commentator Edward Furst, introduced here a couple of weeks ago in an essay about Young Americans for Liberty, has some disturbing news concerning the way economics is taught at the nation’s colleges.  It would seem that more than a few professors are either poorly informed about the subject, or, like Paul Krugman, downright nutty. Moreover, their ideological bias is pushing the already dismal science beyond the pale of reason. The good news is that young people like Edward, a Mises Institute graduate and online rabble rouser, are fighting hard to combat economic ignorance. In the essay below, we glimpse the young libertarian and former collegian at work. RA] Over the next seven years, the Federal Government is poised to squander triple the amount of money spent fighting WWII. And that’s adjusted for inflation! Total unfunded liabilities on the federal ledger consistently exceed the GDP of the entire world.  The government could raise the top marginal income tax rate to 100% for all those shysters making more than $250K annually and not even cover the deficit. They could liquidate the assets of every Fortune 500 company and every billionaire in America, yet red ink would still flow from Imperial fountain-pens like human and animal waste down the Ganges. “Fear Not!” say the demagogues. “It’s not a spending problem, but a revenue problem!” Once upon a time, such deluded statements earned one a trip to the doctor.  Now, they get you an esteemed economics faculty position at some prestigious university.  I got to know this phenomenon well when I studied Principles of Macroeconomics under Anne Gongwe, a professor at Colorado State University. Anne is a delightful person, but I must say, her Ph.D. would better serve as kindling for Rick’s readers during the coming collapse than as a qualification to inculcate

FOFOA blogspot has taken pains to lay out the most cogent, exquisitely nuanced and, ultimately, persuasive argument for hyperinflation that I have read to date.  You can access it by clicking here.  I've responded as follows but plan to write later, in agreement, at greater length. Sheesh!  Where to begin?  It's difficult to give up a belief system that took root 30 years ago, but I find your arguments irresistible.  I took notes as I read the essay, thinking to rebut you point-by-point; instead, halfway through it I found myself overwhelmed by the clarity of your thoughts.  The real power of this essay is that each step of the hyperinflationary endgame you foresee is entirely consistent with human nature, particularly where self-interest and self-preservation are fated to play out. I will need to find a way to break this gently to my readers, perhaps starting with the old joke you've mentioned about not having to outrun the bear.  It goes a long way toward explaining how the Masters of the Universe will actually benefit from hyperinflation. You've also helped me understand how I could have been so bullish on gold over the years even though I considered myself a hard-core deflationist. It was a conflict between head and heart, really, but you’ve resolved it with the most persuasive argument I’ve seen in favor of gold. Even better, you’ve provided a sound basis for arguing that at $1500 per oz., gold has barely begun to discount the dollar’s final fall. I especially appreciate the patience and humility you showed in walking readers through your argument one gentle step at a time. By not trying to overpower your opponents, you have produced a treatise that is certain to engage many minds.  Thanks for engaging mine -- at a depth that had eluded

Subscriber Paul Bauer has sent me an interesting assortment of charts supportive of deflationist arguments.  Click here to access the set.

The 21st century will resemble nothing so much as the 12th century, according to a fascinating essay forwarded to us by Jonathan Auerbach of Auerbach & Grayson.  The essay appeared recently in the Financial Times and was written by a friend of Jonathan's, Parag Phanna. "Unlike almost everything else you've read by the many pundits provoking you with their year-end view for the future," notes Jonathan, "this rich and readable piece doesn't once mention inflation, deflation, deficits, PIGS, BRICS, or any of the other cliched verbal currency pitched at us lately. Parag apprehends your scrambled cyclical assumptions and firmly yanks you out of that vortex to recognize the secular implications with which we deal. He eloquently articulates the historical wellspring of our more pedestrian and prosaic view of the advent of the levelling of the global economic and social playing field."   Click here to access the essay.

[Gary Tanashian writes a technical and macro-fundamental analysis blog, is the publisher of financial website Biiwii.com and the premium-content, market-analysis newsletter Notes From the Rabbit Hole. In the essay below he explains how the interplay between inflation and deflation is used as a monetary policy tool by the Fed and U.S. Treasury. For the record, Rick’s Picks has long predicted a deflationary depression, but with a precipitous and devastating hyperinflationary phase. RA] I would like to thank Rick Ackerman for the opportunity to continue a conversation that began in 2005 with an email I sent to him in response to an article he wrote about deflation that I felt was beyond the usual boilerplate that keeps insisting that a deflationary depression will bring all asset prices down. In fact, Rick’s constructive view of gold hints that he is not a knee-jerk gold booster like so many gold bugs, but rather a realistic believer in the idea that not all assets are created equal, especially during times of great monetary stress. There are several notable deflationists who absolutely hate gold, which makes sense since they have been micromanaging its “price” demise since 2002.  While they may be right for limited periods during an ongoing secular deflation against which ever more exponential inflationary policy is brought forth, they will never be right about gold’s “value proposition” in relation to assets positively correlated to growing (or more accurately, contracting) economies, at least during the current secular trend. The garden-variety deflationist preaches global depression and cash-as-king.  Well, he may be half right: cash is good for short-term liquidity and can play court jester, but gold is king of enduring value in the current system as policymakers fight the dreaded deflation beast ever-further off the macro balance sheets. More astute deflationists do not focus on asset prices, instead

Gotta love those inflationists!  We enjoy getting in their faces now and then because their nutty ideas, particularly that inflation is worth worrying about at the moment, can only confuse and misdirect people who are struggling to sort out the facts for themselves. Imagine waiting…and waiting…and waiting for inflation to “break out,” as the inflationists have been doing all too patiently since 1991.  That’s when the Fed put pedal to the metal to escape the drag of recession. At the time, virtually every monetarist in the land was predicting that a nasty inflationary spiral lay just ahead. All we got in the end was the kind of inflation that no one noticed, let alone complained about: asset inflation. Greenspan sealed his reputation as a bubblehead forever by finally noticing the bubble, although, to his further discredit, he was only explaining at the time that no one with a trained eye who was watching for a bubble could be faulted for having failed to see one.   And now, finally, deflation is overpowering the myth of monetarism itself – the myth that the Fed can fine-tune economic cycles by creating “money” out of thin air.  Turns out it’s not so easy. In reality, the banking system’s feather merchants succeeded only in building, one nearly indiscernible layer at a time, a debt juggernaut that can no longer be controlled, let alone reversed. Deflation has suffocated the monetarists and is about to do in the Keynesians for good measure. It is also continuing to tighten its grip on just about anything that can be bought or sold.  We’ll say more about that in a moment, even after conceding up front that inflation eventually is going to be a huge concern, since an outright hyperinflation will be needed to wipe hundreds of trillions of dollars’