Depression in the USA - Deflation verus Inflation

[tricha]

WELL folks, its game on, But where does this leave you ????? Where does this leave me, hopefully a rental house goes unconditional on Friday and a big hunk of debt goes.
I was hoping hyperinflation would kick in, debt would vanish .....................,

Monday, March 15, 2010

March 15 2010: Inflation: God is the ultimate hedge





Marion Post Wolcott Snowbirds January 1941
"Guests of trailer park enjoying the sun and sea breeze at the beach, Sarasota, Florida"


Ilargi: Today we have a guest contribution from one of our regular commenters, El Gallinazo, who weighs in on the dead horse of inflation vs. deflation, dissecting a John Williams Shadowstats paper. And while Stoneleigh and I here at The Automatic Earth haven't had any doubts on the issue in "like forever", keeping the discussion alive in some form may be useful, if only simply since it won't go away.

Just let me state two issues that are obvious to us before handing you over to the cantankerous vulture:

1. There is no way we'll get into hyperinflation BEFORE debt deflation has run its course.
2. There is no way the Federal Reserve (or ECB, Bank of Japan) can print enough money, electronically or physically, to fabricate hyperinflation, as long as the debt deflation train hasn't finished running over our economic systems.
3. After that train is done, it's anybody's guess; the damage done will be so severe there may not be a Fed left to inflate even a party balloon.

El Gallinazo: Beating the Dead Horse (again)

Everyone with three functional synapses and an opposable thumb knows that we are headed into a second great depression. Optimizing survival strategies for anyone lucky enough to have any assets really boils down to the question of deflation versus hyperinflation, or a sequential mixture of the two. Most of the hyperinflationistas are morons, even the ones that don't have a faux Nobel. So it was a pleasure when a commenter at The Automatic Earth tipped me off to John Williams' -relatively- recent paper:

Hyperinflation Special Report (Update 2010)

Even my cantankerous self wouldn't dare to call Williams a moron. So here we have three hyper-intelligent people with three different viewpoints on the subject.

• Robert Prechter: Depression with giant deflation. Cash is king. Inflation nowhere in sight.
• Stoneleigh (as well as Ilargi) at The Automatic Earth: Same as Prechter but with the caveat that when nearly all credit disappears and globalized markets cease, then hyperinflation is likely to kick in. As to a timeline of transition from deflation to hyperinflation, Stoneleigh recently indicated 2 to 5 years.
• John Williams : Like the two above, he also predicts a great depression with deflation as the immediate outcome. However, Williams differs in that he claims that the deflation will be very short lived, a matter of months, and will morph quickly into hyperinflation.

A possible answer to this quandary can be approached by posing the two following questions:

1. Would the Fed ever want hyperinflation?
2. If so, is the Fed capable of instituting it?

Well, the vote breaks down as the following (as far as I can figure):
Both 1) & 2): Prechter and Stoneleigh - no; Williams - yes.

Prechter is quite clear that the Fed would never want hyperinflation and even if it did, it is quite incapable of pulling it off. Stoneleigh has not really weighed in on whether the Fed would ever want hyperinflation, but she is quite clear that until deleveraging is complete, that the Fed is incapable of instituting it. By that time, the Fed may not exist at all and would certainly be quite different than it is today. Williams has claimed that the Fed has wanted inflation since its inception in 1913, and is quite capable of pulling it off.

Well, I am going to weigh in with some opinions now. Williams defines hyperinflation far more severely than I would. He defines it as inflation that is so severe that the money is worth less than the fabric which it is printed on in a matter of months, and people use it as kindling and rather unhygienic bathroom tissue. In this regard, I would imagine uncirculated bills might fetch a certain premium due to their cleanliness.

Williams claims that hyperinflation is the only way out of the debt trap other than default on treasuries and unfunded obligations. It never seems to occur to Williams that since most unfunded obligations, such as Social Security and Medicare / Medicaid are owed to the helpless and the pissants, as long as NORTHCOM can prevent said pissants from stringing them up to the nearest lamppost, the oligarchs would have little remorse on reneging on these unfunded obligations.

Prechter points out that the Fed is the ultimate narcissistic institution and always does what is best for the Fed. And hyperinflation would be the Fed committing suicide. If they destroy all value whatsoever to the USD, the Fed is quite out of business.

Furthermore, Williams keeps writing about foreign investors losing confidence in the dollar and dumping them. But he never says how. In a river? Buying gold, Euros, land, oil futures, pork bellies? How are these guys going to dump their dollars? He is very bullish on the Canadian dollar and the Swiss Franc. But UBS, which is in deep doodoo, is 8 times the size of the whole country of Switzerland, and Canada is in a bigger (soon to pop) real estate bubble than the US. Williams almost totally ignores credit and does totally ignore the shadow banking system, which is in a slow motion train wreck. If I had to choose the biggest fault in his argument, that would be it.

In the exciting climax section to his essay, subtitled "Hyperinflationary Great Depression", he does deal in some depth with some of the problems which the Fed would face instituting hyperinflation. He claims that after the crash, remaining cash would disappear and we would immediately enter a poorly organized barter system. He admits that there are probably about $400 billion in greenbacks in potential circulation inside the USA now, and he doesn't explain why they would either disappear or become worthless. While $400 billion is not going to run our economy normally, to say the least, it will buy quite a few eggs and radishes at depressed prices. He seems to be confusing FRN's with stuff like demand deposits. How is the cash going to disappear and how does it become worth less as demand deposits disappear through banks collapsing? One would assume this is a perfect scenario for cash as king, as in Great Depression v. 1.0.

Williams does build a strong case that the Fed has wanted inflation from its inception. But there is a huge difference between inflation and hyperinflation. The former is quite useful in extracting the wealth from the peasants and funneling it upward to their betters, but the latter is, quite obviously, the final debt rattle of the whole financial system. Williams does not distinguish between them. Not all con artists are suicide bombers.

Williams also fails to deal with exactly how Uncle Ben is going to pump a gazillion dollars into the economy with any velocity. He admits that doing it electronically is problematic as by then most of the people will have lost their credit card accounts. Printing it and dropping it from helicopters as Uncles Miltie and Ben have suggested also doesn't seem to fill the bill. Squirrels and birds would feather their nests with them.

Then he writes about runs on the banks and how the Fed would fly cash, hot off the press, into banks that were being run on. Even if this were to happen, which I doubt would last more than a few days in a systemic banking collapse, it would not be hyperinflationary as the Fed would just be replacing checking account credit, that had absconded to money heaven, with paper. In terms of the total credit and money supply, it would just be a push in Vegas vernacular.

Well folks, just read this final section for yourselves. If Williams were a mystery novelist, the critics would totally pan him for not pulling all the strings together at the conclusion. It's more like he builds a really strong case for mega deflation, pulls a magic wand out of his back pocket, makes a few passes with appropriate sounds ...... and puff - hyperinflation. Well, read it for yourself, and comment.

I enjoyed the essay, however, as it got my tiny 125cc, single cylinder brain firing at high rpm's, but as to the substance of the work, he just doesn't pull it together. Brings me back to my science days, when a researcher's data point to conclusion A, but the guy is totally invested in B, so somehow he twists the data to support B in a final paroxysm of cognitive dissonance.

As a counterpoint of sorts, I would like to point to another article, this on Zero Hedge by Doug Hornig, titled The Big Dead-Cat Bounce
Much shorter and well worth reading. Toward the end, Hornig writes:

"That means it’s likely, in the not_too_distant_future, that the government will be confronted with a very stark choice between defaulting on the debt or trying to inflate its way out. The former would kill off economic growth and likely launch a worldwide depression of epic proportions.

Disastrous as that would be, if the alternative is chosen and Washington’s printing presses beget hyperinflation, that would probably be worse. In a serious deflation, those who have saved for a rainy day can make it through okay. In hyperinflation, which unconstrained further spending could easily bring on, everyone loses. The truly prudent prepare, as best they can, for either eventuality."

(Well, that's exactly what I am doing by investing in Reverend Billy's Passbook to Heaven account. God is the ultimate hedge.)

What is interesting about this quote is that Hornig poses the question of hyperinflation or deflation as a very conscious political choice on the part of the oligarchs. Weimar chose hyperinflation out of revenge to screw the French. "You want blood money? Well here it is and you can wipe your butts with it." Uncle Ben doesn't strike me as a suicide bomber. When he lies in state, he expects his beard still to be immaculately groomed.



Below, for what it’s worth, are some of the notes and page references which I made when reading Williams’ article.

• Williams defines inflation and deflation in terms of prices and not the change in the sum of money credit and velocity. p 5
• However, he implicitly recognizes the Automatic Earth definition with: "Importantly, a sharp decline in broad money supply is a prerequisite to goods and services price deflation." p 21
• Using Williams's CPI, I calculated that the real rate of average price increases since 1982 averaged 13% a year. This would be what the MSM refers to as "inflation." Williams strongest asset is as a statistician who corrects BLS bull**** vis-a-vis the CPI and unemployment.
• Williams states that his adjusted CPI never fell below 5% rate of change since the financial crises while the BLS CPI went negative. I wonder how his statistics deal with the value of residential and commercial real estate collapse? This is a huge deflationary pressure either by price or money supply definitions. p 16
• For full disclosure, Williams states that he is a conservative Republican of the Libertarian wing. p 17
• Williams states that the actual federal deficit is currently at $9 trillion a year. I wonder exactly how he arrived at that figure? p 18
• Williams keeps repeating the phrase "dumping of dollars and dollar denominated assets" yet he does not define the other side of the trade. Real estate? Gold? Euros? Swiss Francs? Pork bellies? While Williams admits that the dollar has "soared" since the start of the financial crises, he writes this off to central bank manipulation, but offers no meaningful evidence. Seems contradictory. He repeats like a broken record that Bernanke wants to castrate the dollar, yet here, the central banks, of which the Fed is chairman of the board, suddenly gets into a huge manipulation to strengthen it on the forex markets. Hmm.... p 26
• "(2) Includes gross federal debt, not non_public debt is debt the government owes to itself for Social Security, etc., the obligations there are counted as "funded" and as such are part of total government obligations." p 29.

Is this correct? My understanding was that the Social Security Trust Fund was part of the $12T current public debt.

[winner69]

This joker has got it right as well

Could be interesting times - '...... he expects developed economies to be sucked into a deflationary quicksand. His gloomy prognosis for the next five years involves “hyperdeflation, followed by rampant inflation, with a smattering of stagflation thrown in for good measure.”



http://www.businessspectator.com.au/...cument&src=sph

[Dr_Who]

This joker has got it right as well

Could be interesting times - '...... he expects developed economies to be sucked into a deflationary quicksand. His gloomy prognosis for the next five years involves “hyperdeflation, followed by rampant inflation, with a smattering of stagflation thrown in for good measure.”



http://www.businessspectator.com.au/...cument&src=sph

Hold on for a wild ride of your life.

[tricha]

Hold on for a wild ride of your life.

Interesting times ahead .

Pray For Inflation -- It's Our Only Hope
by Peter Gorenstein

Everyone thinks the Fed's job is to fight inflation, but right now the Fed is actually doing everything it can to cause inflation.
Why?
It part to help the economy get cranking again. Inflation provides an incentive for people to spend cash rather than saving it, because if they save it, the cash will lose value rapidly.
Inflation also helps solve another problem, though--our debt problem. The more inflation we have, the less our dollars will be worth. Because our debts are based on a specific number of dollars and not a specific value, the less our dollars are worth, the easier it will be for us to pay off our debts.
(Imagine owing someone 100 Zimbabwe dollars at a time when the currency is collapsing. If you wait a week, the value of the Zimbabwe dollar will have collapsed, and you'll be able to pay off your 100 Zimbabwe-dollar debt with currency that is only worth half as much as it was the week before).
The Fed can't admit that one reason it wants high inflation is to reduce the real burden of our debt, but you can bet that that's one of its objectives. What's more, says Nobel-winning economist Paul Krugman, inflation should be one of the Fed's objectives. Because that's how we've gotten out from under debt burdens in the past.
Here's Krugman:
So how did the U.S. government manage to pay off its [World War 2] wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade.

In other words, after World War 2, we didn't "pay down" our debt. We grew into it.
And, importantly, this growth came from a combination of real growth AND inflation:
The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956. So inflation is an important tool in getting us out of this mess. It's painful and unfair--those who have been responsible and saved money will pay the price for those who borrowed money, racked up huge debts, and spent more than they could afford. But it's what the Fed is (quietly) aiming for

[tricha]

Reading between the lines of the last depression, trade wars were the order of the day, currency was linked to the gold standard.
Today there is no standard, only paper!

So are we in the throws of the next leg down, currency and trade wars, you better believe it's a real possibility.

7 October 2010 Last updated at 23:33 GMT
IMF chief's warning of currency war 'real threat'

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Dominique Strauss-Khan on "rebalancing" of the global economy

Global currency wars pose "a real threat" to economic recovery, the head of the International Monetary Fund, Dominique Strauss-Kahn, has warned.
In an interview with the BBC, he said currency disputes showed countries were not co-operating as well as they had during the financial crisis.
In recent weeks both the US and Europe have led criticism of China over its undervalued yuan.
Meanwhile, Japan has been forced to intervene to curb rises in the yen.
Separately, Indian Finance Minister Pranab Mukherjee on Thursday warned that imbalances in the global economy have become "not sustainable". But he urged major economies to shun confrontation to avoid a feared currency war.
Washington 'watching'
Mr Strauss-Kahn told the BBC that there were signs that countries were trying to use their currencies "as a weapon".
"The willingness of the countries to work together, which was very strong at the climax of the [financial] crisis is not as strong today," he said.
"'Currency war' might be too strong, but the fact the countries want to find domestic solutions to a global problem is really a threat to the recovery."
Continue reading the main story “Start Quote

We have been saying for years that the [yuan] was undervalued”

End Quote Dominique Strauss-Kahn Managing director of the IMF
He added that China would have to revalue the yuan in order for the country's economy to reduce its reliance on foreign export markets.
Mr Strauss-Kahn agreed that China should act to raise the value of its currency "the sooner the better".
But he warned against placing too much importance on it.
"We have been saying for years that the [yuan] was undervalued," he said.
"[China] will go in this direction - the question is the speed. Certainly they can go faster than they are today.
"On the other hand we shouldn't believe that all the imbalances in the economy today will be solved if the value of yuan was changed."
The US has been at the forefront of criticism of China's currency policy.
It claims that China is keeping its currency artificially low in order to aid its exporters, hurting US competitors.
On Thursday, Washington reiterated that China needed to take steps relating to its currency.
"We are watching and evaluating the measures and the steps that they take. We continue to believe that China must take steps," White House spokesman Robert Gibbs said.

[STRAT]

What a crock.

Looks like just another example of America picking a fight to get what they want and blaming someone else for a mess created in their own back yard to me and as usual England and Europe tow the line.

More important they are looking for any way possible to get the rest of the world to carry the burden of their debt.


I guess we will be in for a blanketing western ( US ) media campaign on the evils of Chinese monetary policy similar to the one on the global threat posed by Iraq before it was invaded.

[Financially dependant]

Nicely said Strat

[RRR]

I read the whole thread today-Interesting that many of you saw GFC coming well before it started. Well done guys and I am impressed!!

I read the other day that many 'foreign citizens' are abandoning US citizenship due to very stringent tax laws!! Brain drain has started to happen albeit slowly.

[digger]

I read the whole thread today-Interesting that many of you saw GFC coming well before it started. Well done guys and I am impressed!!

I read the other day that many 'foreign citizens' are abandoning US citizenship due to very stringent tax laws!! Brain drain has started to happen albeit slowly.

To be technical it should be said a brain rebalancing. Except for the last very few years the US has enjoyed a positive brain drain,it is only now reversing.Spent the first 21 years of my life in Canada and we always were told about the US ripping off Canada's best brains.

[tricha]

What a crock.

Looks like just another example of America picking a fight to get what they want and blaming someone else for a mess created in their own back yard to me and as usual England and Europe tow the line.
.

Crock or not Strat, blame dose not get the US out of this situation, trade and currency wars will be the prelude to the next round of what will be called "The Greatest Depression"

Paul Volcker,
Former FED chairman'States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s. Gold is the final refuge against universal currency debasement.'


You have no gold exposure? You are Insane.

Saturday, 9 October, 2010 3:59 AM


From:
"Minesite"




Dear Minesite member,

You have no gold exposure? You are Insane.
'We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself. We are no longer talking about a single country having a big depression but the entire world.'

Paul Volcker,
Former FED chairman
'States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s. Gold is the final refuge against universal currency debasement.'

Ambrose Evans-Pritchard,
The Telegraph

‘I expect much higher gold prices in the future. Not just $1,500, but multiples of that. I think in the future the average of the notional long-term gold price is going to be much higher than anybody imagined. I don’t think we’re ever going to see gold below $1,000 again.’

Jeffrey Nichols,
Senior Economic Adviser, Rosland Capital
MD, American Precious Metals Advisors
‘The era when people have faith in paper currencies is drawing to a close. Even the mighty dollar is flawed as the Fed once again turns on the printing press for another round of QE. There is one currency controlled not by politicians but by nature and that is Gold and God is just not making any more of the stuff. As both private investors and Central Banks lose faith in paper they will turn to gold and the supply just is not there. This is basic economics. For the paper currencies supply is increasing & demand falling. For gold the reverse is true. For gold to match - in real terms - the level seen at the top of the last cycle in 1980 it needs to trade at $2,000 oz. But this time that will be just the starting point. If you have no exposure to gold you are taking the most almighty risk with your wealth and that is something you really must change at once.’
Tom Winnifrith,
Senior Fund Manager, SF t1ps Smaller Companies Growth Fund