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More Reasons Why Deflation Will Rule

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We usually like to kick off inflation vs. deflation debates with an incendiary essay of our own, but this time we offer you opinions from two outside sources, one predicting more deflation (Hoisington Quarterly Review and Outlook);  the other, a hyperinflation (Shadow Government Statistics, published by John Williams.)  If you read Ricks Picks  regularly, you’ll already know which side of the debate we’re on. We have shouted deflationist warnings from the rooftops since the mid-1990s, writing on the topic  for Barron’s, the San Francisco Examiner and other publications for longer than anyone else we know of.

Marks

Our grasp of deflation’s inexorable logic began with the 1976 book, The Coming Deflation, by the late C.V. Myers, and continued with Davidson and Rees-Mogg’s The Great Reckoning. Although Myers’ work was obviously premature, the economic law on which his argument rested is immutable:  “Ultimately, every penny of very debt must be paid – if not by the borrower, then by the lender.”  This is the crux of the inflation vs. deflation debate, and because of the way Myers framed it, we’ve never had any doubt that the U.S. would eventually experience a catastrophic deflation (see: UK Deflation). We were early in thinking the financial system would topple as a result of the allegedly “mild” recession of 1990-91 and its S&L crisis. In retrospect, it’s clear that we lacked the imagination to see that the huge amounts of Third World debt that threatened the global economy at the time were relative chump change compared to the galactic sums that Bush, Obama and the Federal Reserve have advanced the banks in the last three years in the futile hope of saving them.

Hyperinflation ‘Eventually’

We should mention that although we agree a hyperinflation in the U.S. is all but inevitable, we have no patience for generic predictions that say only that it will occur at some time in the future. Of course it will.  It absolutely must, since the U.S. is far, far deeper in hock than the taxpayers can ever repay with real money.  But that is not the point. The more immediate and crucial concern, practically speaking, is whether a hyperinflation will be launched in time to bail out the 80 million or more homeowners who eventually will be underwater on their mortgages.  Looking at TARP and all of the other bank-friendly bailouts that have been tried so far, we have strong doubts that property owners are about to be saved by a screw-the-lenders uprising on Capitol Hill; moreover, we doubt that the beginning of a hyperinflation spiral is even imminent. Whatever happens, hyperinflation will not come by accident;  it can only occur as a result of a deliberate political decision. Anyone who argues or believes otherwise, or who thinks “helicopter money” is forthcoming, should read Adam Fergusson’s When Money Dies: The Nightmare of the Weimar Collapse.  We’ll lay odds that not one inflationist in a hundred could explain how all of that German printing-press money actually found its way into the consumer economy. But this book explains it in detail, and when you understand how the Germans did it, you will understand why we cannot – at least, not without the legal and political mechanisms that were in place in Germany in 1921, such as the statute that permitted certain large employers and local authorities to issue their own scrip. This provision alone helped kick the Weimar hyperinflation into high gear when the government’s currency-printers went on strike in the summer of 1922.

Germany’s Dubious Feat

Not that we will necessarily want to duplicate Germany’s feat, since, as I have pointed out to the inflationists innumerable times, effecting a hyperinflation would be tantamount to destroying savers and lenders as a class as well as all of the institutional conduits of savings, such as the bond markets.  Considering the price we would pay – a generation of credit-less destitution — is it any wonder that both Bush and Obama have favored bailout schemes designed mainly to keep the banking system from going under?  A cynic would say that the government knew all along that the banks would not lend the bailout money – that they would instead deploy it in stocks and Treasury paper, creating the illusion of recovery.  Regardless of whether Obama & Co. knew this would happen, it has in fact happened, resulting in a bank-lending collapse with deflationary implications that would seem to be impossible to deny. But that hasn’t stopped the inflationists from trying.

One of them is John Williams, an economist whom we greatly respect.  He has assiduously tracked U.S. unemployment figures, revealing the brazen fraud that underlies the Labor Department’s monthly data. His estimate of U.S. unemployment has been creeping toward 20%, double the official estimate. But on the subject of hyperinflation, Williams appears to have loosened his usual standard of proof. For one thing, in his 36-page “Hyperinflation Special Report,” he goes on for 28 pages before even describing a plausible trigger for hyperinflation – i.e., the direct purchase of Treasurys by the Fed.  Peter Schiff has already covered this ground and made a far more compelling and detailed case for hyperinflation. He foresees a day when the Fed will be the only buyer of Treasury debt. When other bond markets unsupported by the Fed on that day begin to collapse, it will necessitate Fed monetization of all bonds: munis, corporates and everything else. Voila! Instant hyperinflation. This seems quite plausible to us, though not at the moment.

Key Questions Unanswered

A more glaring weakness in Williams’ argument is his tacit acknowledgement near the beginning of the report that there is no way for consumer spending to ramp up sufficiently to cause inflation, let alone hyperinflation. He tells us that consumers have no borrowing power (true), that household income has been falling in real terms for a long time and is unlikely to recover (true), and that households have no savings net of what they owe (true).  So how would hyperinflation start in a consumer economy almost completely bereft of purchasing power?  Williams doesn’t say. Nor does he try to estimate, for one, how many Mercedes Benzes America will be importing if the price per car is $50 quadrillion?  Or how much oil we will buy at $10,000/barrel. But the question remains nonetheless: How will all of that money to bid prices up to those levels enter the consumer economy?

Even without answers to these questions, Williams’ monograph is well worth reading because it brilliantly describes the forces that are causing the economy and financial system to fail and explains why this trend is irreversible. No one steeped in the details of this scary report could remain unpersuaded that the worst is yet to come for the U.S economy.  And that is why we strongly recommend that you read it. [The original report, we’ve come to learn, is copyrighted material. For more information, visit Shadowstats.com.]

We promised a good argument from the deflationist camp as well, and it has come to us in the form of a quarterly report from Van Hoisington and Lacy Hunt at Hoisington Investment Management Company.  This is one of the best and most insightful reports on the mounting juggernaut of deflation that we have seen to date.  The crux of it is contained in a single paragraph – one that die-hard inflationist and money-supply junkies will need to think about before they come to the Rick’s Picks forum armed with yet more half-cocked and ultimately implausible arguments:  “The federal government’s promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt.”   Click here to access the full report.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

Please do not ask trading questions!

  • OF December 17, 2009, 8:11 pm

    There seems to be a mistake in the article, maybe syntax, hyperinflation has never to do with a ramped up consumer demand. Hyperinflation is what happens at the end of a hyperdeflation/depression. No demand – great debt, is the hyperinflation whip. It actually doesn´t matter what government or laws one has. If there´s a run on hard assets, a crack-up boom, which will by the way drive up indexes to stellar level, then you will have a hyperinflation, whatever law you proclaim, then you have it on the black market. A simple gold or oil backwardation will do the trick in a day, too.

    Hard asset stocks will explode. Funny enough, those stocks which have not as well appreciated in this rallye, most with good dividends, are the ones to go sky high. Idea stocks will go bust. Idea money, too.

    So, no crack-up boom, yet. Unless the dow just keeps rising from here. There is absolutely no consumer demand in this calculation. Consumer demand only counts as long as markets go relatively normal and this is still just a bear market rallye.

    When the crack-up boom comes, then run. And hopefully you have your war and desaster dividend stocks in real somewhere safe. This is maybe the first time, where a bunker in the earth might actually be no crazy idea.
    Remember, one silver-dollar gets you a bottle of whiskey since time began. And an ounce of gold pays for a month rent in a good place, since time began.
    Let´s all really pray hard that this stays just talk.

  • Socrates December 15, 2009, 6:02 am

    In a globalized world with electronics ( internet) the main processor, wealth is determined by “capital flows of money.” All economics and teachings were/are based on the gold standard ( mises et al) and teachings at the prestigious colleges on economics are 39 years behind the times. The Flotating exchange system has brought on enormous damage as profit can be made on trading currency even if the asset or invesment in the country goes down.

    The floating exchange system is the nemesis ( the Hoodlums took off the gold standard to their benefit and all the sheep said amen) and “capital flows” is all that matters in a globalized world.

    So yes the US is economically worse than Haiti, and has been for a long time if we measure debt. But you don’t see the way of life in the US as you do in Haiti….you have stock market booms, busts, now metal booms, more food, alchol, hollywood, movies, porn, religion, war…etc….. HOw come? Haiti has been a bust all along and the US economy measured by debt and unfunded liabilites is worse than Haiti. So what gives? All economics theory, books, economists and you people keep spouting the same old economic garbage.

    Two reasons, “Captial flows” and the “Gun.” Like Rome “Power” and ” Might’ will keep American going for a long time. You guys keep reading those famed books and Mises ( who I believe ended up as a pauper and had no money at the end).

    So throw all you economic books of yesteryear and even now…..they just don’t apply.

    So in 2010 ” the sheep must be slaughtered before the feast can begin.” Yes, all will crash, gold to $640, silver to $8.00, coffe, corn, beans, sugar, et al. ONLY commodity going up is the US index to 95 at the top.

    Yes, All “the sheep must be slaughtered before the feast can begin.” Remember this as you see Rome/US burning in 2010 ( NY real estate crash/Insurance co crash, indices crash) and depression talk is heralded and the US Dollar Index ratchets up…..only to collapse in to 2012 at 41 cents. ( Mayans) and 2013 the Fed party.

    Depression will happen NOT now but in…… 20*2. ” It is written so shall it be done.”

    “Do the opposite of what you read and your own mind is telling you” to be a great trader. That is if you cannot read a chart or patterns or know TIME.

    The people who caused this collapse already have the solution…..you just don’t know it, because you don’t get the game. You busy reading too many economic books. As Roosevelt stated ” Nothing is a state happens by CHANCE.”

    The US controls everybody in the world with its debt and thereby controls everything and confirms it with the “gun.” And you have religious folks preaching about the devil yet to come….”blind leading the blind.”

    Rome lasted for 1000 years. 1776…………long way to go.

    I have a bonfire started….throw aways those stupid books and “Free your mind so the MONEY will follow.”

  • test December 14, 2009, 7:54 am

    it seems the moderator did not publish my comment cause it was against his conclusion… are you reading ….moderator ?

    &&&&&&&

    For starters, it was rude of you to have given a phony e-mail address and a non-name. Look people in the eye when you address them. RA

  • UG December 13, 2009, 1:09 am

    The most recent hyperinflation example (Zimbabwe) occurred with a collapsing economy. Seems to me if the government continues to expand the
    debt and monetize it via Fed purchases of the treasury auctions, inflation via the destruction of the dollar is certainly possibly if not inevitable.

    If the Fed continues to monetize the debt, don’t you think the rest of the world may want more of our dollars for their goods and services, or may flat out refuse to accept our dollars for their goods and services regardless of whether our consumer is tapped?

  • George Drake December 12, 2009, 10:51 pm

    Chris T.’s comments are on the money. D G Bokare’s and most other arguments about inflation/deflation err in respect of being based on both fiat and fractional reserve banking systems. Prof. Antal Fekete’s lectures on the pre-WWI system of discounting real bills to finance domestic and international production and trade, and industrial and mortgage savings societies to finance factories and buildings, with honest specie in the hands of the people, show that the “overproduction” fallacy alleged against the capitalist system is a bogus artifact of unsound banking and monetary policies. Under a specie standard, the system of discounting real bills quickly and automatically adjusts production to demand. It also automatically adjusts interest rates to keep investment and production capacity from over-expanding, because of unwonted suppression of interest rates due to prodigious emissions of debt and currency.

    One author who writes about the natural tendancy towards abundance is Prof. Cal Beisner. His books, such as “Prosperity and Poverty” are well worth the read because of his totally different perspective on economics and society.

    I gather Rich is writing somewhat tounge-in-cheek; since his idea that the dollar is not headed for immediate collapse must be based on the fact that it has already(!) collapsed by a factor of 50 in less than 100 years – or, as he says, by 84% in 7 last years. It amuses one to wonder how much something must collapse before it is conceded that it has collapsed.

    Only one of the taxes Rich mentions for replacement by a transaction tax is unconstitutional: the federal income tax. Let’s see, “What shall we tax today?” says the bureaucrat. “Let’s tax the producers” (making everything more expensive). “Let’s tax trade” (slowing commerce, reducing sales and increasing costs and uncertainty for everyone). “Let’s tax the hardworking” (favoring sloth). “Let’s tax the rich” (reducing capital accumulation available for investment). “Let’s tax the common man who pays for it all anyway” (oppression of the masses). “Let’s tax wealth and savings” (better squander it before it gets taxed: heirs and future posterity to the devil). “Let’s tax consumption (sales tax, luxury tax, import duties, excise taxes) so that everyone contributes to the commonweal. The rich can flaunt their wealth or save their money and invest it to enhance the availability of new goods and services – and so can any hard-working individual.” “Let’s tax sin” (only the “evil” pay; and since increasing the cost of something reduces demand, there may be some practical morality to this). “Let’s tax real estate” (a tax the truly poor are unlikely to have to pay). So, there are lots of alternatives. Which one will Rich pick if Rich picks for Rick’s Picks? Ha, ha.

    Just as no law has improved on the Ten Commandments since Moses, no theory of economics has improved on the basic principles in the “Wealth of Nations” since Adam Smith. It’s easy to sense that a transaction tax militates against the idea of efficiency in economic relations. This is just the sort of obnoxious impost that caused the Colonists to revolt against King George. But, in fact, a look at any trade ticket from your stock or commodity broker, or any purchase ticket from your grain elevator, will show tiny amounts for SEC fees, “checkoffs,” NFA fees, and the like. These fees are like a tiny transaction tax. The difference is, they are very much smaller than the amounts floated in DeFazio’s trial balloon; and they actually are supposed to pay for something that supports the industry or trade group to which they apply. [Emphasize, “supposed to.” And, because they are “supposed to,” they are called “fees,” not “taxes.” Farmers have favored the checkoff fees; as, it is perceived to be assisting their industry overall. But, Ag institutions tend to be independent, quasi-gov’t entities run by people with real experience in the business. Based on the writer’s experience, SEC is no help whatsoever in ordinary cases of securities fraud, nor in preventing fraud.] So, what justification would there be for a vast expansion of the gov’t grab on these transactions to fund other purposes, unrelated to the trading activity, when they don’t even do any good with the funds now going to the gov’t for a specific purpose?

    Finally, you ask, “what is increasing in price?” Huge increases in some property taxes (about 80% in Mohave Co., AZ), medical insurance (up 18% this year, after huge increase last year just for moving to different zipcode, and not for age or condition), fertilizer and grains (both up a great deal from 2 years ago, even though way down from peaks last year), seed, sugar, cocoa, restaurant meals, gov’t fees, honey, canned goods (vegs, fruit, fish), frozen foods (fruit, vegs), nuts, dried fruit, electricity and telephone service (esp. minimum fees), safe deposit fees. These are all things in my own experience – and, yes, I do economize as much as possible. The question was, “what is increasing in price?” Of course, it depends on one’s time perspective. It’s easy to see every time one gets notice of a 20% increase in a basic service. And generally, one knows after several years of inflation that the price of everything he is buying seems to have doubled! And, it depends on the measuring stick of “price.” One might agree with Keith that, against gold, silver, or copper (the historical monetary metals), none of these prices have increased at all! It certainly illustrates the confusion caused by government manipulations of money and interest rates, in collusion with the prime banksters.

  • Jeff Kahn December 12, 2009, 6:20 pm

    Deflationists and inflationists are missing the point. What matters as far as investing is concerned is monetary stability and monetary instability. Instability will always make an economy vulnerable to black swan events, the outcome of which is unpridictable, except to say it will foster much more instability. Buy Gold.

  • Chris T. December 12, 2009, 9:40 am

    Rick:

    Here are some pictures of interesting Weimar period scrip, “Notgeld” (distress/hardship/need-money) in local usage.

    Interesting is, that artistically speaking much of this “money” was rather good.
    Also of interest is that much of this is issued in the lowest denominations in 1921 +1922 also, not the multiple zeros.
    And, many of them were self-expiring, see below.

    a) These are Meissen Porcelain coins, in 5+2+1+0.5+0.2+0.1+0.05M:
    http://pic3.lot-tissimo.com/mf.php?PHPSESSID=kso83295671nbt6354sosgr3r6&mf=./288/bilder/extra/7-230.jpg
    They were specially designed to withstand circulation, and existed in many different versions, by the factory, and also by other issuing municipalities.

    b) This one is fom a series that serially tells a local story, in 0.50M:
    http://www.suehnekreuz.de/KUNST/NOTGD07.jpg
    This one was valid for one month

    c) This one is a 1M, issued 11/1/1921, expires 3/1/1922:
    http://www.suehnekreuz.de/KUNST/NOTGD02.jpg

    Seeing as these were intended for use, and were used, one must have still been able to buy stuff for 1M in 1922. Probably then, the picture above, or of people burning stacks must be from the final weeks and months of 1923, the final parabola…

  • ricecake December 12, 2009, 3:57 am

    What Deflation?

    Forget about all all that long argument and many books. All come down to this: “How much well one can live on a $1000 monthly paycheck.” As simple as that.

    It’s never about deflation. It’s always about inflation. It’s always about How much the inflation and how fast. During the housing bubble rent gone up lot, DWP up, transportation up, insurance up so inflation during that time up a lot. Now the rent down a little but still not enough. Gasoline still expensive. Insurance is not cheap. So the inflation is not as high as last year and the year before. Still it’s inflation says my monthly paycheck.

    &&&&&

  • PhotoRadarScam December 12, 2009, 1:00 am

    “What things are increasing in price? RA”

    Gold, silver, health insurance & care come to mind.

  • keith December 12, 2009, 12:54 am

    What things are increasing in price? RA

    Ah Rick, you got us there, gold is. Which, if gold is a defacto money then in DEFLATION gold will RISE….. or at least fall less. Just like in the 1930’s. Cash is king and gold is the ultimate form of cash. Readers, lets not get confused anymore thinking we are inflating just because the price of gold is rising.

  • JR December 11, 2009, 9:55 pm

    I have a question regarding the deflation and the argument that money is not going to those who will spend it. Won’t the government just spend it for us? What is restricting government spending?

    Also, the statement given is support of deflation that, “The federal government’s promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt.”

    I agree that more debt is not a solution but it appears that this is what’s happening and it seems inflationary through the expansion of public debt. I don’t think consumer (private) debt will expand rather I think it will contract but public debt will expand. Is this arguing hyperinflation that then leads to deflation?

    &&&&&&

    What things are increasing in price? RA

  • Rich December 11, 2009, 9:24 pm

    We don’t all agree the dollar is headed for collapse.
    It fell 84% from 2001 to 2008 and is currently rebounding.
    Keynes proposed the Transaction Tax to stop Speculation over Enterprise.
    Of course, those addicted to the Wall Street Casino may oppose a tax that could replace
    the IRS, property and sales taxes to restore productivity.
    Meanwhile, some important reading, particularly the 75% 1998 collapse of the Russian Ruble and 90% collapse of the Russian Market after years of Western Loan.
    IMF and Rubin said everything was fine a month before it happened. Written by a future SEC Chair…

    http://www.fas.org/news/russia/2000/russia/part00-summary.htm

  • Other Paul December 11, 2009, 9:22 pm

    We are witnessing the erosion in value (deflation) in all upper layers of the now familiar “inverted pyramid” (derivatives at the top, physical gold at the bottom) of assets.

    The next asset class victims in the pyramid, triggered by the death of the dollar, are long-term Treasuries. We see the erosion of the bid ratio this week and the flood of the short-end bids.

    Paper gold as a commodity will be next. See stories about the resistance to physical settlements on the exchanges. When COMEX, London and other location’s players get too nervous about settling in a depreciating dollar, that will free up the value of physical PMs from it “commodity value” in the pyramid.

    When stockholders get nervous about selling their holdings in exchange for a depreciating dollar, the “equity” layer’s value goes south.

    Next, eroding the value of the electronic cash layer of the pyramid:
    Zero interest rates are going to be a 1 inch high hurdle in people’s decision to convert digital cash to physical notes, and stuff the safe deposit box “mattress” or use PVC tubes for burying the loot.
    FDIC going broke will “incentivize” holders to break their contracts on “generous” .5% per annum CDs.
    Wait till people final hear about the dropping of Fed protection on the money market accounts after another fund breaks the buck.

    Last autumn we almost witnessed the destruction of the electronic cash layer of the pyramid. Wait until we see runs on the banks and money market funds to convert digital cash to Federal Reserve notes. Federal Reserve Notes will flood the market, and, possibly lead to scenes of children stacking bundles as pictured, above.

  • TC December 11, 2009, 8:55 pm

    Number of federal workers earning six-figure salaries has exploded during the recession,

    For feds, more get 6-figure salaries
    Dennis Cauchon | Dec 11

    USA Today – The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data.

    Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession’s first 18 months — and that’s before overtime pay and bonuses are counted.

    Federal workers are enjoying an extraordinary boom time — in pay and hiring — during a recession that has cost 7.3 million jobs in the private sector.

    The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

    When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.

  • Chris T. December 11, 2009, 8:14 pm

    To DG Brokare,

    I have to disagree. Ludwig von Mises (along with Rothbard, Hayek, to an extent Boehm Bawerk) all had very much to say about abundance.
    They only focused on the one element in the economic picutre, where it really is a problem:
    fake, ephemeral fiat currency.

    Virtually everything you point out obtains under a fiat curreny system. Within those confines, Keyens may have had some insights. But outside of the Krugman’s of this world, or the bought-and-paid for likes of a JK Galbraith, JM Keynes has been recognized as the charlatan that he was.

    “In the long run we are all dead”, and hence the long run doesn’t matter. That may be true for someone like Keynes, who had no posterity or decedents to worry about, for him “apre moi, le deluge” was may have worked.

    But most people do care about their childrren and grand children’s well being, and try not to ruin that on purpose, or at least negligently.

    As to deflation: The only TRUE prolonged period this country has had was the 30 year or so period after the Civil War, when this country WILLFULLY and PURPOSELY jettisoned the abundance of currency produced during the War of Secession.
    The average price level declined by substantially more than 50% over that time, so that it was back in the early years of the next century, where it had been around 1800-1810.

    And THAT period was the greatest period of rising prosperity this country, or ANY other has EVER seen before or since. That clearly disproves your point.

    The deflationary period from 1929/30 to 1932/33 was hardly long term. It did though, return the price level to what it had been about 20+ years earlier, and the average American was BETTER of due to much greater purchasing power. This average American HAD a job (even then, 75-80% of Americans were NOT unemployed), and plentiful savings.

    The negative side, high unemployment at the outset of these deflationary periods, can be seen in both instances above. The “Depression of the early 1870s, the wrenching, but even shorty “Depression” of 1920, and again the “Depression” of 1929+.

    The only difference in these three instances is what was DONE during them, and their aftermath.
    In the first two instances, the government did NOTHING, and the problems soon ended to be resolved with better times.
    (Now granted, the 30 period was much longer and better than the 20s, but again the difference is key. No Fed in the first period, but certainly one in the latter.
    Money was stable due to the return of a real gold standard in the latter 1800s, which allowed to happen what MUST under stable true money:
    Capital formation, technology, savings etc produce rises in efficieny and productivity, thus greater supply for the same input. This greater = increasing supply of goods vs. stable = non-increasing real money, must appreciate the value of the latter, hence falling price levels. And everyone is better off. Deflation is not bad, after all who doesn’t like lower prices? But that is for a real-money economy, not as Rick has pointed out many times, a fiat/credit/debtor one (fake*money economy.)
    In the latter instance, the government did everything (wrong), and look at what happend after 1933.

    And where does the problem of rising unemployment come from during the start of the deflationary period?

    The wage lag. During inflation, wages lag behind the price level, which is why today, we all earn less than 40 years ago (real wages peaked in the early 70s). But the injured party — workers– does not perceive this well, so takes no real corrective action (that would be throw the bums out…)
    But during (the onset of) deflation, wages lag by staying above declining prices, and here the injured party –employers– DO take corrective action: they lay off workers.
    Workers though, again, do not perceive this increaas in their real wage, so are unwilling to adjust their nominal wage demand to that, so must be laid off instead. They could take a nominal decrease in wage, as their purchasing power has increased, but lack of perception.

    If one compares the historicall consumption stats during 1930-1932 with the image we all have of that period from school, print and film, one sees the dichotomy. If things had been as bad as the Hooverville photos or apple-vendor pix show, how come meat and butter consumption (superior goods) increased, inferior goods such as margerine decreased, and charitable giving was higher than ever before or since. That is not the action of a GENERAL popultaion in dire straits.

    But take JM Keynes, charlatan economists (Fisher, whom Keynes copied), a determined stooge of oligopolistic high-finance like FDR, and you get the mess we all don’t like.

  • mario December 11, 2009, 7:20 pm

    Rick,

    1. I still don’t under or see this monster USD dumping that various talking heads, credible and not credible, keep pointing out…Again I ask these 2 questions… WHY would the world start DUMPING USD which is no worse shape really than the other main currencies? And, isn’t it easy to understand that DUMPING USD is something that will essentially demolish the other major economic centers too, ie Europe and China. For example, if the value of the USD went down further by 20% in the coming six months, European exports would plummet, etc, yes? China holding so much USD also, so they don’t want to see it steeply devalue, do they? I keep thinking the situation is a “fragile stalemate” but a stalemate none the less. There’s no comparative reason to be picking on the USD in the overall bad scenario. You watch this next year. Crises affecting the Euro-zone and GBP will interrupt any USD dumping. What have I missed? And anyone who thinks China is going to unpeg the yuan or let it rise substantially is delusional. The Chinese are indirectly and quietly going in for the kill with a smile on their faces rising to global economic superpower because they have oodles of cash and cash is king. Their budget JUST for new subway lines in 22 cities is USD $129 BILLION!! According to Tom Holland at SCMP, China’s true debt level for next year could be as high as 55% of GDP instead of their claimed 18%, but they have MUCH more than the West in assets, revenues and cash to offset its liabilities.

    How about this scenario: Massive trading/speculating in rotating sectors; they ride the cycles up and down and in fact, cause them to a great degree. The dollar at lows, now they’ll ride it up and the Euro down. Soon, they’ll start riding natural gas back up, and pushing it up, then switch to whatever commodity has cycled down, etc. Oversimplified, and supply/demand certainly has some say in the matter, but valid I think, and certainly we all sure as hell know markets ignore fundamentals.

    J Jay said… a fantasy / retail consumption economy

    What about the rest of the population who is NOT broke, unemployed, over-indebted and/or unemployed? I think this group’s power is being underestimated. Again I keep hearing this kind of doomsday talk about the U.S. economic situation and it is bad but not THAT bad for the folks who aren’t in bad shape!! Yes we can agree that the 10-20% unemployed underwater folks are in very bad shape. The economy will be soft for years certainly, but the survivors after this (ongoing) shift are still around, spending money, living the good life and plenty rich in stocks and their careers to support the economy, even with taking a 30% hit on their home value. They can live with that. I don’t see how this will lead to some kind of economic death spiral. Soft demand for years yes, but a death spiral of demand from U.S. consumers? Nonsense. I’m tired of hearing doomsday scenarios where in fact various assets/markets will just keep rotating up and down maintaining an interconnected balance. The way the news media tries to connect these daily movements with “news” that “caused” the moves is the biggest disinformation ballgame we could ever pay attention to. And finally, don’t we LOVE the various huge influencers going to the media to say that GOLD has gone up too fast and shouldn’t be as high as it is so quickly, etc. They orchestrate the dip they want to accumulate some more!

    Cheers all, Mario

  • Chris T. December 11, 2009, 7:10 pm

    J Jay,

    re: your comment about the high speed train line in China? Is that another Transrapid (maglev) line?
    If so, stolen hook line and sinker from Siemens et al. Not to downplay China’s success, but this would be just another repeat of a large part of what has propelled this.

    Rick:

    “…. since the collapse would never be so kind as to begin during New York or Chicago exchange hours. RA”

    Unlike the PM’s that do not need such kindness. Just looked at the Kitco live charts, yet another of these laughable 8:59 or 9:01 AM taekdowns today, just like last week.

    But, we did have great news on the retail front, +1.3%, and all because we all of us just decided to start drving more again, so that we could allocate more of our money to gas. Couldn’t be the higher price during November, of course not.

  • Dusty December 11, 2009, 7:06 pm

    Ok, so we all agree the U.S. dollar is headed for a collapse. It is either inflation or deflation for the U.S. economy. So which countries are going to have the most stable economies when this happens? Which will benefit from the collapse. Or will this be a global catastrophe that will spread to the rest of the world?

    &&&&&

    Just one word, Dusty: AUSTRALIA. RA

  • Rich December 11, 2009, 7:02 pm

    Dollar finally broke out to upside, suggesting lower bonds, commodities, metals and stocks…

  • D G Bokare December 11, 2009, 6:28 pm

    Depression is caused more by excess supply than demand in most cases. This results in lower profits for the capitalists. They divert their funds toward more-gainful investment games. As such, stock markets are the best bets for such speculative investments to make up the losses suffered in the manufacturing areas due to supplies exceeding demand. Capitalism has for the last three decades graduated from manufacturing economy to financial management economy. Excess of products and services in the market is called abundance by economists. Abundance and capitalism cannot live together. It results in job losses, depreciating purchasing value of currency: and therefore un-ending inflation. This process of capitalist economy is the last stage where manufacturing economy will never get priority due to low profits. This process, therefore, becomes irreversible.

    J.M. Keynes knew this phenomenon when he tried to save capitalists from losing profits and used deficit financing as a tool. He even saved wage-workers from the fear of communism’s influence. He was also aware and afraid that abundance in the market economy could not be totally stopped. He had never projected that his efforts to get out from the Great Depression would be of permanent nature. Prof. J. Pen of Denmark, a close follower of Keynes, had said that abundance would destroy the industrial world so assiduously built by us. He told the truth. The stage has now come where his prediction is being borne out.

    There is no theory in economics on abundance developed in the world any time in the past two hundred years. Capitalism did have business cycles due to scarcity and abundance in the market supplies. This saved capitalism in 1929 and again in 1990-91. Today it is different. There is no J.M. Keynes to help save us from an irreversible depression.

    For the first time in economic history, a theory developed of abundance of goods and services in economics. This gives the opposite results when compared to capitalism as well as Marxist economics. Economist Dr. M G Bokare, a communist wayfarer for over three decades, has developed an economics model for majority of the people of this planet. He was sure about and also predicted the collapse of Marxism and capitalism almost two decades ahead of the collapse of Marxian economics. He was in search of eternal economic order. He was searching for an economy beyond capitalism and Marxism. He found it in abundance in any economy. His book Hindu-economics was presented to the world in 1993 for debate. Second edition of his book is now available through http://www.pothi.com
    Present world economic crisis canot be prevented by pushing trillions of dollars by FED in the hands of banks and Wall Street investment groups. The benefits will never reach the consumers, who are supporting 70% of the US economy, to boost the economic revival. Capitalists are presently happy for getting good returns from stock market on their investment funds diverted from the manufacturing economy. They will not look at the economy of ordinary people. They will try to delay thel collapse of the economy by finding some alternative investment fields for maintaining their bottom lines.

  • Rich December 11, 2009, 6:08 pm

    Trading FAZ above 17.43 STOP…

  • J Jay December 11, 2009, 4:47 pm

    I agree with Rick, collapse of the US economy is in the cards.
    In the midst of economic chaos, average pay for a Federal employee is up to 71k a year.
    There are about 100,000 legal immigrants a month allowed in, not counting the illegal ones.
    The debt ceiling is being raised more and more often, endless wars, a fantasy retail/consumption economy, no manufactured goods to export or consume. An illiterate, obese, unhealthy populace watching football and Oprah on a flatscreen TV and talking about their “meds”. Our currency is just a reflection of all that. I think it is way past the point of turning around. The collapse at the State government level has already commenced.
    I would run away but see no port of refuge. There could be no escape in the long run.

  • Rich December 11, 2009, 3:36 pm

    Looking out below for another deflationary market.
    (How many does it take?)…

  • Mercurious December 11, 2009, 3:10 pm

    Re this comment: But this book explains it in detail, and when you understand how the Germans did it, you will understand why we cannot – at least, not without the legal and political mechanisms that were in place in Germany in 1921, such as the statute that permitted certain large employers and local authorities to issue their own scrip.
    Are we not already seeing more than a few municipalities issuing their own parallel local currencies, or ‘script’? I was under the impression this is not prohibited by federal law and that there is quite an active community of folks working to end-run federal reserve debt as a means of extricating local production from the whims of long-distance overseers. Am I wrong about that? If this is the case, we already have in place a statutory framework to allow a avalanche of paper money to ignite inflation at the Williams’ levels.

  • Trumpet December 11, 2009, 2:49 pm

    If you look at what actually happended during the recent 2 years it seems that in order to reduce Weimar style hardships and turmoil the powers are trying to smooth the path between the intrinsic devaluation of fiat money by inflation and at the same time to avoid full fledged deflation due to extreme over-indebtness. So we see deflationary phases like when Lehman collapsed and alternating times when liquidity is produced by the use of the modern electronic printing press. During both alternating phases people are loosing confidence in the stability of society (no jobs, mortgage defaults, no future perspective, etc) and in fiat currencies. Eventually the market will force bad fiat money out and some form of good money in. Once this change has been completed and sound money will be in place a new economic cycle can restart. What will this sound money be? Just a strongly devaluated dollar or something new? What is the best strategy to get thru the roller coaster until we get there?

  • Peter Montgomery December 11, 2009, 2:11 pm

    Thomas Paine:

    Paper money is like dram-drinking, it relieves for a moment by deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased…. Paper money appears at first sight to be a great saving, or rather that it costs nothing; but it is the dearest money there is. The ease with which it is emitted by an assembly at first serves as a trap to catch people in at last. It operates as an anticipation of the next year’s taxes.

    http://mises.org/story/3010

    As to how Germany got marks into the hands of Germans, gigantic public works projects distributed billions of marks into the public’s hands making the people serfs of the state.

    “The Nazis’ public-works projects and their rapid expansion of munitions production ended the Depression there by 1936.”

    http://www.english.illinois.edu/maps/depression/about.htm

    can you Stimulus Package?

    the play remains the same, only the actors change

  • photoradarscam December 11, 2009, 10:00 am

    “So how would hyperinflation start in a consumer economy almost completely bereft of purchasing power?”

    Easy. People rush to convert the savings that they do have into physical goods. There’s no point keeping it in the banks at less than 0.5% interest. Once people perceive a serious devaluation of dollar that are sitting in savings at negative real rates, the rush to convert dollars to physical assets will cause hyperinflation.

    Consider that (I believe I read somewhere) more than half of US currency is outside of US borders. What happens when these dollars are re-patratiated because foreigners no longer need the USD (for various reasons) and also being to want to dump their USD holdings that are losing value every day?

    Once this action begins, it will feed on itself.

    These articles tend to focus only on the supply side of the equation, but you can’t ignore the demand side. When the demand for the USD diminishes, prices will necessarily increase regardless of whether or not the average Joe has available credit.

  • watcher7 December 11, 2009, 9:59 am

    I am in ‘rough’ agreement with Andie Xie:

    Bernanke Low Rates ‘Poison’ to U.S. Economy, Xie Says

    Shamim Adam, bloomberg.com, December 8, 2009:

    Federal Reserve Chairman Ben S. Bernanke is prescribing “poison” to the U.S. economy by keeping interest rates near zero and fueling a wave of speculative capital that may cause the next global crisis, former Morgan Stanley chief Asian economist Andy Xie said.

    Bernanke is making decisions based on “marginal considerations” that will help short-term growth and employment, instead of focusing on the “soundness of the system,” Xie wrote in an e-mailed note today. The next worldwide crisis will probably strike in 2012, driven by inflation as the low cost of borrowing spurs increases in asset prices, he said.

    “There is a Chinese saying that one could quench the thirst by drinking poison,” said Xie, who predicted in September 2006 that the U.S. economy would fall into a recession in 2008. “Bernanke seems to be prescribing exactly this to the U.S. economy. The slower Bernanke raises interest rates, the bigger the next crisis.”
    Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy. The Fed chairman yesterday said that the U.S. economy faces “formidable headwinds” including a weak labor market and tight credit that are likely to produce a “moderate” pace of expansion.

    Emergency Measures

    “We’ve got to figure out a way to get out of these post- bubble emergency actions a lot more effectively,” Morgan Stanley Asia Chairman Stephen Roach said in an interview with Bloomberg Television in Hong Kong today. “I worry that Ben Bernanke, while he says one thing, will do another.”

    Inflation in the U.S. remained “subdued” and interest rates are likely to remain low for an “extended period,” Bernanke told the Economic Club of Washington.
    Policy makers around the world cut interest rates and boosted government spending by more than $2 trillion as part of emergency steps to counter the global recession. The Japanese government today unveiled a 7.2 trillion yen ($81 billion) economic stimulus package amid signs the recovery and Prime Minister Yukio Hatoyama’s popularity are waning.

    Fiscal stimulus worldwide restored stability “temporarily” and may be inflationary, said Xie, now an independent economist. Asset-price increases are also making a “significant contribution” to global growth, mostly in emerging economies, and industries such as property, automobiles and commodities, he said.

    ‘Too Expensive’

    “The policy consensus to prop up the global economy with stimulus will continue until inflation takes off or governments are broke,” Xie said. “This strategy is too expensive to last.”
    Inflation will likely become apparent in 2011, and a “vicious wage-price spiral” could take place the year after, Xie said. He said the lag between money creation, which happened last year, and inflation may take more than 18 months.
    Asian policy makers are already studying capital controls to limit “hot money” inflows that may stoke asset bubbles and force their currencies to appreciate.
    “Inflation would scare central banks into tightening dramatically in 2012, which would pop the current asset bubble,” Xie wrote. “By then the global problem would be more serious than now. In addition to the leverage problem in the household and financial sectors, the government sector would also be hugely levered then.”
    The trillions of dollars that governments are spending is “buying some time,” Xie said. One of the risks is that governments may not have enough money to “cushion the pain during the coming economic restructuring,” the economist wrote.
    “The whole world is drinking poison to quench the thirst,” Xie said. “It may feel like relief now. The sickness will strike in 2012.”

  • Keith December 11, 2009, 7:26 am

    You’ve mentioned several times in the past that you believe it’s likely that hyper inflation will come and go in a matter of weeks. How could the government deliberately cause a hyper inflation cycle measured in days or weeks and then have the wizardry to reverse it?

    I think you give too much credit to the “powers” having control over the value of the dollar. I believe the world market could flinch and cause the unthinkable. All your points are excellent but the problem that I have with almost all deflationists is they only talk domestically and never talk about about the dollar as a world currency, world market, and the ability of other nations to accept or reject it. Would a collapse in foreign exchange rates cause the price of homes to go up in the U.S.? I don’t know, but everything else will so what difference does it make? Peace.

    &&&&&]

    The “powers” are economic imbeciles, as far as I’m concerned, and that is probably an insult to imbeciles. And hyperinflation won’t need any help to reverse; it is unsustainable to begin with. Foreigners will repudiate the dollar like everyone else, and they may even be a few hours ahead of us, since the collapse would never be so kind as to begin during New York or Chicago exchange hours. RA

  • J Jay December 11, 2009, 5:42 am

    Inflation? Deflation?
    It doesn’t matter if you go to a Los Angeles public high school.
    On the news here tonight it was reported that out of 3500 students at Freemont High that took the math proficiency test, only 45 students passed! Not 45%, but 45 out of 3500!
    On the same newscast, it was reported that China just opened service on a 400 kph bullet train, and have plans to create a network of them.
    It struck me that we are now the pathetic third world hell hole.
    Sic transit gloria!


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