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  • o_bixo_do_mato o_bixo_do_mato Sep 30, 2009 12:44 PM Flag

    Why the deflationists are wrong

    The deflationists can't quite seem to grasp that a contracting economy and deflation are not the same thing. They claim that we can't possibly have inflation due to low capacity utilization, high unemployment, and no possibility for growth in consumer credit. They think that inflation is a demand-pull phenomenon. The Keynesians have fooled them good.

    Inflation is a product of currency debasement - pure and simple. Of course prices for different goods may rise at different rates, or even fall, based on supply and demand fundamentals, but all else equal, currency debasement will lead to higher prices than otherwise would have prevailed. Think capacity utilization, unemployment, and lack of credit growth will hold prices in check? - go ask Zimbabwe, or any other country that has experienced hyperinflation for that matter.

    The deflationists argue that the fed can't possibly print enough money to overcome debt deflation. Clearly they haven't studied history very well. If Germany, Brazil, Bolivia, Hungary, Zimbabwe, Angola, Chile, China, Greece, France, Yugoslavia, and Russia can do it, surely Bernanke can. In fact, in all cases that I am aware of, hyperinflation was preceded by unsustainable debt that was subsequently monetized. I suppose this time could be different, but I don't see any political will in the US to just stand by and let debt deflation occur. If history is any guide, we will continue to use the printing press to avoid default on our impossible-to-pay-back-in-honest-terms debt. That is how it has always happened.

    The deflationists will tell you that the safest place for your money is US dollars and treasuries. Think about that for a second. They are telling you to keep your wealth in IOUs from a government that has just gone on one of the most reckless spending orgies in history. And even worse, this government is not even pretending that they will ever pay their debt down, much less stop issuing new debt. Their plan for the next decade is to go 9 trillion dollars further in debt. Betting on the US dollar appreciating is like betting that someone with maxed out credit cards, a negative amortizing option ARM, and no job will have their credit score increase. Remember, our currency is backed by nothing more than the perceived creditworthiness of our government.

    I think we will probably continue to see prices for assets purchased with leverage (ie real estate) continue to fall for a while. But betting on basic goods and services going down in price over the long-term will have disastrous consequences.

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    • I have debunked this 20 times on this board. Credit (debt really) is a larger portion of the money supply than the monetary base is BY FAR. As the dept is destroyed either by repayment or default, the money supply shrinks faster than the fed can reflate it via debasement of the montary base.

      Same as happened in the 30s.

      But of course you will not believe such logic so I guess we will just have to watch the price of silver and oil and gold to see what the market thinks about it.

      • 1 Reply to prosperousdude
      • <Credit (debt really) is a larger portion of the money supply than the monetary base is BY FAR. As the dept is destroyed either by repayment or default, the money supply shrinks faster than the fed can reflate it via debasement of the montary base.>

        This seems to be the argument that most confuses people. The deflationists think that in order for inflation to occur, the money supply needs to be expanded by an amount greater than the contraction of credit. This is making the erroneous assumption that a $1 increase (or decrease) in credit has the same effect on prices as a $1 change in the stock of high powered money. This is clearly not the case. Take for example the growth of household + government debt since 1980. It has increased by approximately 1000%. Yet consumer prices have not risen nearly that much. So if the correlation between credit expansion and consumer prices has been difficult to understand over the past three decades, it is silly to think that there will be a 1-to-1 correlation as credit contracts.

        A major problem is that it is difficult to define what money is anymore. Take for example Greenspan's admission to Ron Paul that he has no clue what constitutes money in our present system:


        "Mr. Greenspan: “Let me suggest to you that the monetary aggregates as we measure them are getting increasingly complex and difficult to integrate into a set of forecasts.

        “The problem we have is not that money is unimportant, but how we define it. By definition, all prices are indeed the ratio of exchange of a good for money. And what we seek is what that is. Our problem is, we used M1 at one point as the proxy for money, and it turned out to be very difficult as an indicator of any financial state. We then went to M2 and had a similar problem. We have never done it with M3 per se, because it largely reflects the extent of the expansion of the banking industry, and when, in effect, banks expand, in and of itself it doesn’t tell you terribly much about what the real money is.

        “So our problem is not that we do not believe in sound money; we do. We very much believe that if you have a debased currency that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years. And the standard we employ is whether it gives us a good forward indicator of the direction of finance and the economy. Regrettably none of those that we have been able to develop, including MZM, have done that. That does not mean that we think that money is irrelevant; it means that we think that our measures of money have been inadequate and as a consequence of that we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes until we are able to find a more stable proxy for what we believe is the underlying money in the economy.”

        Dr. Paul: “So it is hard to manage something you can’t define.”

        Mr. Greenspan: “It is not possible to manage something you cannot define.”



        I personally don't know how much monetization will be necessary to offset the deflationary forces of credit contraction, but I am fairly certain that currency debasement will ultimately drive the dollar to the same fate as EVERY other fiat currency in history.

        The fact is, our debts are now so great that they are impossible to pay back in honest terms. In order to avoid an embarrassing default, the Fed absolutely has to keep monetizing. Every country (that I am aware of) that has had to resort to money printing to avoid defaulting on their sovereign debt has seen there currency destroyed through inflation. I know of none that experienced a deflationary collapse.

        It's a very longshot bet that things will play out differently this time. Good luck.

    • Hyper Monetary inflation will not translate into hyper price inflation until a viable, credible, safe investment vehicle comes along to absorb the massive increase of wealth created in the developing world over the last 11 years. Once bitten twice shy. Tripple A rated mortgage backed securities/collateralized debt obligations have scared new and old wealth from growth to safety, and so far nothing else exsists in the world that has the girth and perceived safety of dollars. Real money will be made in metals when that new vehicle comes along.

    • exactly!

    • libertarian websites. Inflation needs 2 drivers...first..loans from reserves have to be made. This isn't happening because both lenders and borrowers are afraid of a contracting economy. This is precisely what has happened in Japan...Yes, I know..WE are much smarter than the Japanese. Second, you have to have velocity after the credit is shoveled out the door.
      Years ago I took an intensive seminar from Murray Rothbard at the Hoover Institue at Stanford. Everyone kept insisting that the dollar was doomed and we'd all be trading silver coins and gold very soon. Rothbard took out his wallet and held up a dollar bill
      and explained that while all of us hated it..the rest of the world didn't. When people are scared..they buy dollars..not gold. Sound familiar????? It's now called the risk aversion trade.
      With all these piles of money the Fed has created..name two items people use that have gone up in price??? I can name dozens that are much lower than 2 years ago..and I'm betting that we've only just started. You won't see inflation for at least 3 years..and silver is going back below $8.00

      • 3 Replies to g1r2p3
      • <Inflation needs 2 drivers...first..loans from reserves have to be made. >

        Nope, severe inflation is never a result of consumer credit expansion. That's another Keynesian misconception. Go check your history books - you won't find one instance of hyperinflation that was caused by credit expansion. Hyperinflation is the result of governments trying to avoid default on unsustainable existing debt.

        As for Japan, we are comparing apples to oranges. The only similarity we share with Japan is monetizing debt. The US is in a far more precarious position, because unlike Japan we:

        1) are a debtor nation (Japan ran huge trade surpluses)
        2) have an artificially strong currency due to reserve status
        3) have a so-called "consumer-based" economy (Japan had manufacturing-based economy)

        Furthermore, we absolutely need to continue monetization, just to avoid failed treasury auctions. The Fed accounted for an incredible 50% of all treasury purchases in the second quarter.


        <Years ago I took an intensive seminar from Murray Rothbard at the Hoover Institue at Stanford. Everyone kept insisting that the dollar was doomed and we'd all be trading silver coins and gold very soon. Rothbard took out his wallet and held up a dollar bill
        and explained that while all of us hated it..the rest of the world didn't>

        Yeah, betting on a strong dollar a few years ago was a great bet. Nice call Rothbard. I'd ask for my money back:

        http://tfc-charts.w2d.com/chart/US/M

        <When people are scared..they buy dollars>

        If predicting the future was as easy as extrapolating the recent past, everybody would be a millionaire. I'm sure Madoff's investors thought their money was safe.

        Unfortunately all ponzi schemes come to an end - the irredeemable US dollar will be no different.

      • Excellent. Give my regards to Murray.

      • >>> With all these piles of money the Fed has created..name two items people use that have gone up in price???

        You fools will never get the real consequences of "depression", lower velocity of money, or lower lending in the US. It means China and the rest of Asia are accelerating the VELOCITY of decoupling from the US. No more cheap products, no more cheap commodities, all paid by debt.

        You will see prices of all imported goods and commodities go up in spite of depression in the US and huge unemployment.

    • the_great_majestic_rawdog the_great_majestic_rawdog Sep 30, 2009 11:18 PM Flag

      Good post except you are missing something.


      We are not monetizing our debt. So far all the treasury auctions have gone gang busters. Foreign countries think its crack. Hell even China is adding dollars. The whole world has a vested interest in propping up the US dollar because if it goes it is not just America that gets screwed. All those other countries you named had little affect on the rest of the world. America and US dollar is what makes the world go around. America is surely and without question the Babylon the bible talks about.

      I agree sooner or later the whole thing will come down and foreigner will stop their stupidity at any cost but that day could be years or even decades. Silver and Gold are strictly long term plays. If you are looking for some "Big Event" sometime in the near future you may be disappointed. The Fed can funnel enough money to Banks to short silver and gold forever. The only thing that can change this is if there is a physical shortage which I assure you there is not. When you have APMEX slashing premiums to off load a million ounces you have too much silver! If your one of these Ted the douche bag Butler kind that guy has been spewing the same garbage for years and nothing has happened. The CFTC ain't doing shit. That is a guarantee. It is all rigged and the big players rule the roost. They own America the goverment included


      Its all rigged. The only question is for how long. I believe for a long long time.

      • 2 Replies to the_great_majestic_rawdog
      • The Fed is indeed monetizing the debt and our Treasury auctions are not what they appear to be. FYI the foreign central banks owned huge amounts of crap agency paper from FNMA and FRMC. They are selling that to the FED and not losing money on it- the FED is overpaying what it is really worth. Then the proceeds are being used to buy new Treasury bonds. It is a total scam. The FED is covering the losses for them on the agency debt but only with the restriction they use the money to buy new T-bonds. Second, the primary security dealers are also buying T-bonds at auction with an agreed upon deal from the FED that the FED will buy them from them the next week at a higher price and lower yield. This makes the dealers millions of dollars and gives the appearance everybody wants T-bonds. Total scam at taxpayer expense. They are all crooks. The FED is forbidden to buy treasuries directly at auction so they use this ruse to fool everybody that there is huge demand for T-bonds. Although the FED has stated publically that they are monetizing the debt so it is not completely hidden from view.

      • "We are not monetizing our debt"

        Really? What exactly do you call the fed creating money to buy $300 billion in treasuries, $1.2 trillion in mortgage backed securities and $200 billion in agency debt?

    • good post

      • 1 Reply to greekdell
      • O Bixo,

        Great to have ideas knocked around once in a while!

        I agree that over the long run, the dollar is in deep trouble. That is the reason I buy physical silver and hold it long term.


        Short term, I am looking for a trade here and it seems to me that EVERYONE is short the dollar. That makes me go "hmmmmmm". Also, I have been hearing ads for gold like never before. BUY GOLD, BUY GOLD, BUY GOLD!!! hmmmmmmmm.

        Some interesting reading from Bloomberg regarding US debt.

        http://www.bloomberg.com/apps/news?pid=20601087&sid=aKvtw723S1c0


        US government debt is still considered safe....at least to China. They own 800 BILLION of it and have recently increased the stake. When China no longer wants our debt, the trouble begins.

        Right now, I'm looking for a trade!

        Later

    • Well said. Best post I've read on this board. Keep buying silver- we are still in early stages of a parabolic move. During this type of move you don't worry about the price you pay you worry about how little you are buying.

      By the way, some of the regular posters like texblond, letx=0, Prospernot, Etc.. can learn a lot from this 27 year old.

    • Excellent post!!!

      • 1 Reply to DanW1024
      • The Fed DID NOT print enough and the money is not making it to the people via credit and loans. Additionally, people are now saving! This is deflationary.

        How about this for a scenerio.

        1. Banks make bad loans
        2. Fed bails out banks (bad debt)
        3. Banks take money and invest in equities and do not write down bad loans which prop up earnings
        4. Equity market starts rockin sucking in the masses who don't want to get left behind by rising stock prices.
        5. Banks sell taking the money from individual investors and THEN take the loss from the bad debt. (its a wash)

        Just some of my thoughts.

    • Excellent read. I own lots of silver. I think you will be proven dead on in the next few years. Heaven help us.

    • thank you some with half a brain

 
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