Sep 042012
 
 September 4, 2012  Posted by at 11:50 am Finance
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Detroit Publishing Co. "Primitive ferry, High Bridge, Kentucky River" 1907

Our Down Under roving reporter Skip came up with a few interesting questions when watching an interview that Russia Today recently ran with economist Richard Duncan.

Where doth debt take us going forward, and, for that matter, where has it – really – taken us so far? If and when Japan implodes, does that force the US out of the possibility of moving – or already being – into the Japanese deflationary scenario and into something more sinister? Will it be a quadrillion dollar long-term drip-feed, in essence prolonging death, or a massive quadrillion dollar diversion into breakthrough technologies? Both perhaps? Go halfsies?

Come to think of it, do we (still?!) live in capitalism or is it really just creditism?

And how come Richard Duncan has this unshakable faith in these "cutting edge" technologies? Why is he so sure that they would make the US a great economic power? Are there any examples out there that would prove this, for instance, or does Duncan simply make it all up as he goes along? Is he a believer in 21st century magical realism?

 


Skip Breakfast :

Does Richard Duncan have it going on?

Or is this economist missing something?

 


Richard Duncan on Riding out this Depression on a Deflationary Debt Raft!


He recognizes we are teetering on a deflationary death spiral. But sees more than one possibility unfolding from this point, as follows:

1) the aforementioned deflationary depression;

2) a Japanese scenario in which the government drip-feeds trillion dollar stimulus for 5 to 10 years, keeping America on life-support…but resulting in an un-repayable deficit a decade later and the aforementioned (but delayed) deflationary depression (nevertheless, he adds, postponing certain death until later is better than certain death today); or:

3) the US government learns from the Japanese scenario how spending on "bridges to nowhere" didn't solve the problem, and instead massive government spending is diverted into breakthrough technologies, in particular renewable energy like solar, thereby becoming a world leader in such technologies and securing another century of US economic dominance.

The problems I spotted with Duncan's three-pronged outlook are (unfortunately) within the theoretically preferable option 2 and option 3.

In option 2, Duncan himself points out that Japan is going to implode sooner than later, with its current debts equal to 240% of GDP. And so I wonder how on earth the U.S. could continue to fund the multi-trillion dollar life-support model he pre-supposed can last for 5 to 10 years. I would expect that a Japanese implosion would quickly scuttle such a plan, as the will to follow in Japan's footsteps would immediately be shaken–not to mention that a Japanese implosion would be so brutally devastating on world bond markets that I doubt the U.S. could actually fund such a plan.

Japan has had the benefit of a quarter century of American and European credit-backed "growth". The US would have no such world to borrow from. And so, I can't see the current drip-feed model lasting long enough to emulate Japan in any real respect. Can the U.S. just print at will in such a post-Japanese-default scenario without losing the total faith of the bond market? I don't believe so. So, this route quickly becomes politically and economically untenable.

Finally, his option 3 sounds far too much like spending trillions hoping to learn magic powers. Yes, new technologies will be discovered, and we'll need them. But they won't be sufficient to replace existing but too-expensive technologies (like oil). At least not in nearly enough time. I'm much more persuaded by James Kunstler's arguments in Too Much Magic, wherein he posits that the time for hoping for miracles like flying cars is over, and the time to begin preparing for the long emergency has begun. And so Duncan's option 3 ends up being a risky quadrillion dollar bet that isn't necessarily all that different than option 2's bridges to nowhere.

Which sends me right back to square one and the dreaded deflationary depression.

Would love to know what anyone else thinks are the merits or weaknesses in Duncan's outlook.

 


Home Forums A Quadrillion Dollar Deflationary Debt Raft

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September 4, 2012 at 11:50 am #8441

Raúl Ilargi Meijer

Detroit Publishing Co. "Primitive ferry, High Bridge, Kentucky River" 1907 Our Down Under roving reporter Skip came up with a few interestin
[See the full post at: A Quadrillion Dollar Deflationary Debt Raft]

September 4, 2012 at 7:51 pm #5347

draego454

>> massive government spending is diverted into breakthrough technologies, in particular renewable energy like solar, thereby becoming a world leader in such technologies and securing another century of US economic dominance.

One of our many problems, stemming from how we attempt to engage with the global economy, is that there is no business sector which China is unable to take away from us using some or all of industrial espionage, slave labor rates, pegged and manipulated currency, government subsidies, punitive import tariffs, etc. Regarding the promise of renewable energy jobs to betrayed US workers, they are already sliding overseas and out of our grasp.

Until we realize that charges that Protectionism-is-a-dirty-word from today’s whore economists are corporate koolaid to the masses (to get them to accept being eviscerated by globalism), we won’t be able to take steps to protect US manufacturing from predatory practices.

Steven in Dallas

September 5, 2012 at 3:18 am #5353

skipbreakfast

Hey Steven in Dallas, I agree that the notion that protectionism is “all-evil-all-the-time” is deeply rooted in the growth-and-globalization religion. A truth that these “Growthers” never really admit is that protectionism has never completely gone away–it was just more selective. And protectionism will certainly return with a vengeance. And that’s not all bad either. Rather it’s another part of the cycle, and probably necessary, and most definitely unavoidable whether we want it or not.

I can’t help thinking that maybe we really have swung too far the other way–towards some distorted world where a government’s policies to encourage international “competition” trump the health and well-being of the population it’s charged with caring for. In contrast, Duncan is definitely in the camp that all protectionism is evil.

Ultimately, I am more of the mind that protectionism won’t return so much due to government policy but due to an imminent break in credit supply that floats the container ships and then a break in oil supply that drives them. I think the credit crunch will out-sprint any willingness of governments to return to the kind of protectionism which Duncan fears. Perhaps, if protectionism is forced upon us by extraneous limits rather than policy, we should call it by some other name. Suggestions?

Anyhow, we get protectionism either way. And we’ll learn it’s not all bad (if you accept that growth and globalization aren’t all good).

September 6, 2012 at 4:34 am #5386

sangell

I’ve long felt that economic arguments for ‘free trade’ , namely Ricardo’s theory of competitive advantage were flawed. Outside agriculture, where obviously it makes no sense to try and grow pineapples in New York or coffee in Alaska, one place is as good as another when it comes to manufacturing provided there is a basic infrastructure. Honda can put an auto plant in South Carolina or Osaka and build cars. Given the degree of automation in modern manufacturing even labor costs are not the factor they once were. Increasingly it is political factors that matter in the location of production facilities. Tax and regulatory policy can be more important than hourly wage rates as can the degree of labor docility or militancy. No one would put a car plant in the UK in the 1970′s because of militant trade unions. Today the UK is home to a number of foreign car manufacturers who prefer British tax and regulatory policy to that on the continent.

September 6, 2012 at 5:43 am #5387

skipbreakfast

That’s a great point sangell–how the impetus for free-trade is not its celebration of “efficiencies” but rather distortions in the marketplace in another kind of “race to the bottom”. In this case, a race to the bottom of wages and corporate controls.

***********

Further to my question about what we might call the oncoming “protectionism” which is actually instituted by a credit crunch and not by government policy or the rationales of the likes of Ricardo: I realized that it’s best to take out the -ism (which suggests a philosophy or point of view) and add a -tion (which suggests a description of a state of being). So rather than protectionism, we’d get something more like re-localization.

I think it’s a useful distinction. Because it underlines that the upcoming credit crunch won’t be temporary, but will be a new state of the economy throughout the rest of our lives. And one of the deflationary ramifications will be that we will be forced to manufacture and buy much more locally (re-localization of our economy), as opposed to having the luxury of supporting/rejecting trade policies like free-trade that are now only feasible in our credit-rich world.

September 6, 2012 at 10:48 pm #5392

Professorlocknload

Is it all bad? All the time? If inflation/credit expansion is the destruction of currency and savings, and deflation is the revaluation of them, how is deflation so destructive? Could it be that maybe it’s time we live within our means again? Sure, it might cause the loss of a few credit created baubles, but I just don’t see it as the end of civilization. These adjustments from “nirvana” back to reality have happened many times through human history, and it seems progress always results after the chaos.

But then, I suppose fear of loss is a powerful driver of emotion. Good news of any sort is a hard sell these days. Still, in the end, the Phoenix will rise, no?

September 7, 2012 at 2:05 am #5397

skipbreakfast

Unfortunately, yes, deflation is very destructive, and will be particularly destructive on the heels of this record high inflationary credit-bubble of the past quarter-century. But I agree that it’s not “all bad”–there are many silver linings to the scenario despite the destruction. It’s necessary even. But just try to tell that to a woman who is starving or the man who has lost everything with no chance of ever getting it back. They will outnumber the people who appreciate the silver lining in the near-term.

September 8, 2012 at 5:57 am #5425

Lucas Durand

It’s interesting that an economist like Duncan, who first percieves then writes a book about the reality of looming deflation can’t seem to think further outside the box than his “option 3″ – which really doesn’t sound like an option at all.

Even if it were clear that technology could somehow deliver us from the consequences of all this complexity – which it certainly isn’t – how on earth would that type of change be effected? Does he offer any insights or suggestions in this regard?

September 8, 2012 at 2:47 pm #5430

sculptor

at 23:22 Lauren querries Duncan: what about Steve Keenes solution? a debt jublie through Govt grant payments to all citizens that first must go to pay down debt, (or after personal debt is paid, becomes savings gift.)
Duncan @ 23:47 responds “It won’t work, one person’s debt is another persons asset, if you destroy all the debts you destroy the assets and banking coillapses” I don’t think he understands Keene’s plan, Keene is not looking to “forgive” debt, but to pay it off. Further he would be rewarding debt-free savers with increased assets to spend into the economy. While Keene’s plan is not perfect, Duncan’s refutation of it is flawed. Keene is saying not to TARP the robber banks with govt largesse in a top down approach, but rather that govt bailout should to the little guy screwed down with debt in a “trickle up” economic rescue, and at the same time reward savers, who are a good thing in an economy…rather than penalizing them.

Raul, I hope you’d play the Steven Keene interview that Lauren Lyster did perhaps a month or so ago…and open Keene’s plan up to discussion on this forum.

ps, thankyou Valadamir Putin for RT and Lauren Lyster, one of the bright spots we poor propagandized Americans can find spin free honest discussion of the economy….sort of reminds me of the old days of “Radio Free Europe” when American would broadcast alternative views of the world across the “Iron Curtain” to counteract “communist propaganda lies” toeastern europeans yearning for truth ……hmmm, there needs to be a new term here,…ahh! “The Irony Curtain”

ps Ducan’s “manhattan project” for energy has merit. It would be great in say algea/oil scale up research. Aimed at creating an organic diesel growing industry that can employ several million folks as algea farm workers, say doing things like using the excess heat, CO2, and water vapor at coal energy plants along with excess off peak load electrical energy to create bio-diesel fuel and sequester CO2 as well as create fertilizer and plastic feed stock as by products. We need local low tech jobs in industries that produce something of value, thats what makes the world go around. we can’t all be college PHD hi-tech engineers, nor can we survive as an economy without producing a product of value by growing it , mining it , manufacturing it….if we all just flip burgers and give each other haircuts for a service economy there is an eventual “capitol entropy” that spirals us down in debt eventually.

September 8, 2012 at 4:15 pm #5434

skipbreakfast

sculptor post=5121 wrote: … Ducan’s “manhattan project” for energy has merit. It would be great in say algea/oil scale up research. [...] we can’t all be college PHD hi-tech engineers, nor can we survive as an economy without producing a product of value by growing it , mining it , manufacturing it….if we all just flip burgers and give each other haircuts for a service economy there is an eventual “capitol entropy” that spirals us down in debt eventually.

Absolutely agree. But the problem is the mis-allocation of capital away from productive innovation in favour of real estate investment and financial service industries deeply infected the economy decades ago. Today, the economy is terminal and the point is that we’re talking about an imminent deflationary death spiral–those expensive hot-houses of invention that Duncan talks about won’t deliver the miracles we need in nearly enough time. This is stuff we should have started planning 25, even 50 years ago (while concurrently moderating the expectations for our living standards…as if!).

As I also mentioned, we will need these innovations. But they’re probably going to benefit a future generation. In the meantime, it’s unrealistic to expect a renewed focus on these initiatives to pay off enough to AVERT the depression the way that Duncan suggests it might.

We need innovation sooner than later. But we need to prepare for the depression NOW.

p.s. … The RT interview with Keen on his debt jubilee makes for very interesting discussion. That is something that at least would affect us today–for better or worse. Certainly worthy of a lot of consideration and debate. I don’t think anything precisely like it has ever been attempted (which makes me wonder if it ever will be)–I wonder if it could work. I agree with you that Duncan doesn’t adequately respond to Keen’s idea and seems to miss the critical point you mention.

September 8, 2012 at 8:10 pm #5436

Lucas Durand

We need innovation sooner than later. But we need to prepare for the depression NOW.

This is stuff we should have started planning 25, even 50 years ago (while concurrently moderating the expectations for our living standards…as if!).

Exactly…
I get so tired of hearing “smart” people proffer half-baked “solutions” that have only some theoretical connection to the world we actually live in.

September 8, 2012 at 11:40 pm #5438

Jack

I am curious to know when the interest rate will start to go higher because that is when we will see a reversal of commodity prices and also the markets.

September 9, 2012 at 8:56 am #5440

Babble

One of the largest drivers of costs is energy. If we develop new energy resources to greatly slow the use of oil (saving it for plastics, medicines, etc) and coal (it is dirty and causes global warming). we can transition into a sustainable society.

LENR will help solve the energy problem. That and other technologies like the Cyclone engine and Plasma transition engine can greatly reduce CO2 emissions. They will also help reduce the debt as energy will become much cheaper.

September 9, 2012 at 9:20 am #5441

skipbreakfast

Babble, I’m curious if you’ve explored James Howard Kunstler’s “The Long Emergency”. He is not very optimistic about new energy innovation in the near-term. And his perspective has a lot of support from some pretty well-informed experts in oil and energy sciences, including TAE’s own Stoneleigh.

Again, we do need new innovations. Some will help our lives.

Again, they won’t save us from the imminent deflationary death spiral.

Babble, are you saying that these new energies will come online fast enough to transition 7 billion people from an oil-dependent economy to a renewable energy-based economy BEFORE we have a breakdown in finance? I for one don’t believe that for a second. I still advocate that such innovations are worth exploring with great determination…but I don’t advocate doing so at the expense of preparing for the crisis we will have in the meantime.

There is some real trouble coming at us fast from a lot of angles. Our dependence on oil is currently pretty much absolute. The infrastructural changes to wean us off oil and onto new energy-forms will cost trillions and trillions, will take years if not decades, and will not deliver the amount of energy we’re used to getting from oil and coal.

So let’s be realistic. And optimistic (as much as we can be). Let’s get our own house in order for the very immediate problem of survival, so that we can live long enough to start transitioning to some new technologies, recognizing that our standard of living across the world will drop precipitously–I’m okay with that though. I enjoy horseback riding a lot.

September 9, 2012 at 10:51 pm #5448

pipefit

I’ve read quite a bit over the years about what a special guy Richard Duncan is, in terms of monetary analysis, but he seems rather ordinary after listening to that 28 minute discussion with Lauren.

For one thing, he seems to be stuck in the same box as everyone else in terms of dollar devaluation. None of the major currencies can devalue against each other, for the reasons given by Duncan, but they can all be devalued simultaneously against gold/silver.

In fact, this devaluation is well under way. This is why gasoline, food, health care, and just about everything else is up, in dollar terms, so much. As with most other bubbles, this one will be unwound in a hyper inflationary orgy of money printing.

On the one hand, Duncan correctly grasps that at this late stage of credit expansion, the USA can’t continue to spend a third or more of tax revenue on the military without dire fiscal consequences. But then he fails to draw a fairly obvious inference from this. He thinks we will muddle along for another 5 or 10 years, like Japan, perhaps forgetting that Japan spends only a pittance on defense.

He also mentions that trade protectionism is a strong possibility, and that it would gut the Chinese economy. He fails, however, to mention an intermediate step. Very early in this trade barrier building process, trillions of trade deficit dollars now locked up in foreign held treasuries/agency debt would be repatriated in a tidal wave of hyper inflation.

I’d give him ‘B-’, for above average, but no more.

September 10, 2012 at 4:44 am #5449

skipbreakfast

pipefit post=5139 wrote: For one thing, he seems to be stuck in the same box as everyone else in terms of dollar devaluation. None of the major currencies can devalue against each other, for the reasons given by Duncan, but they can all be devalued simultaneously against gold/silver.

In fact, this devaluation is well under way. This is why gasoline, food, health care, and just about everything else is up, in dollar terms, so much. As with most other bubbles, this one will be unwound in a hyper inflationary orgy of money printing.

Appreciate you chiming in on the Duncan interview.

Of course, I seriously disagree with your hyper-inflation call. There is simply so much evidence to the contrary.

Grocery prices increasing even 10% do NOT indicate a hyper-inflation. That’s absurd. Not when major assets around the world are droppping in price by double and triple that amount. For more on why such a hyper-inflationary call is absurd, check out Mike Shedlock’s cogent analysis:

“Every time the US dollar ticks lower, commodity prices tick higher, or the CPI rises two tenths of a percent, hyperinflationists come out of the woodwork with nonsensical predictions and silly comparisons to Zimbabwe or Weimar Germany.”

Again, “the prices of things” don’t even tell us anything definitive about whether we’re in a deflation or inflation, and can be dangerous red-herrings that keep us from making the necessary preparations. I made a lengthy argument in this regard in the TAE comments recently.

It’s important to keep in mind that hyper-inflations are not triggered by efforts to stimulate economic recovery and create jobs, the way Bernanke is attempting to do. Hyper-inflations are triggered by collapsed economies that throw in the towel on the people in an effort to repay debts in a currency which the world has rejected. We are not in that scenario. Not yet–not even close–in at least this respect: the world is clearly NOT rejecting US dollars or Swiss francs or even “German euros” when you look at interest rates and currency buying activity. The big players are finding security WITHIN currencies, not outside of them.

Despite the repeated calls for hyper-inflation, it has not happened. Rather we just get increasing evidence that the money supply is illiquid and DEFLATING. Despite being lone voices in the wilderness, pretty much everything that TAE has called for is happening before our eyes (if on a painfully protracted timeframe). By all measures, we’re in a deflation or teetering precariously close.

When you’re hungry, you want dollars so you can eat. When you’re broke, you want dollars so you can pay your rent. When you see an opportunity, you want dollars so you can buy into that opportunity. Gold is just a means to try to get more dollars. The day when you buy groceries with your gold is a long way off yet.

At least look at current indications as a guide. In what respect has gold begun to replace our confidence in currency besides the price going up. The price of Apple stock has gone up too. I do not take that as any indication that we have lost faith in currency and will soon be buying our groceries with Apple stock. Gold is unique in its ability to always retain some value no matter how low it goes. Gold can still go up in price, as a speculative bet. But it is not yet indicating a hyper-inflation at all, because when I see dollars flashed in front of a person, they want those dollars badly. Try spending your gold at Tesco. They would think you were a loon. You need a specialized gold broker to trade your gold for dollars, and it costs you money every time you do that. What’s it going to cost you to trade your gold for dollars if those brokers go out of business and vanish? Who will trade you dollars for gold to pay for your groceries then?

Despite the money printing over the past few years, all we see is that it has failed to stimulate the economy in a meaningful way. As Ponzi World writeswith regard to (possibly) imminent QE3:

“…if the Federal Government is going to continue running $1.3 trillion dollar deficits (aka. new bond issuance), then Fed monetization programs equal to that amount are not stimulative, they simply prevent new bonds being issued into the private market. Any amount of monetization less than the deficit would in fact be contractionary, as new bonds will enter the private market and “crowd out” other investments.”

And also from Zero Hedge’s article The Fed Is Not Printing Enough Money:

“…the amounts needed for the Fed to be able to create inflation are much, much higher than what we have seen so far. And it is not guaranteed to work.”

Indeed, our jobs are vanishing as is made clear by the recent jobs report. And remember this, from John Rubino:

“The real driver of inflation is labor costs, how much people are making,” LPL Financial’s Valeri said. “Salaries aren’t increasing much at all.” Valeri said he favors intermediate-maturity corporate bonds because “interest rates are going to stay low for a while.”

There is a distinction between “inflation” and “hyper-inflation”. They’re not even necessarily related phenomena, and it’s unfortunate they both contain the same root-word. One is primarily an economic force (dictated by the velocity of money). One is a political force (i.e., a final socio-political collapse).

It’s a shame that so many people aren’t preparing for the possibility of deflation, even if they still fear hyper-inflation, because so many indications are turning out to demonstrate that TAE has been right all along. There are growing numbers of hyper-inflationists who now concede we will at least have a “temporary” deflation. Of course, TAE has never said deflation will be permanent. But TAE has argued that it will go on longer than we are prepared for. Gold won’t help you if that’s all you have in a deflation. Having some gold set aside, if you can afford it, might help you in the short-term if you are lucky enough to play the ups and downs right, and in the very long term if you can pay for your needs until the deflation has played itself out. You will not be able to use gold to pay for your basic needs in the midst of the worst of the deflation. We have barely even begun the deflation, and the worst will make today’s extend-and-pretend seem like a very distant memory.

September 10, 2012 at 6:25 am #5451

pipefit

Hi Skip,

I have quite a few problems with your post. Let’s start with this line from you: “Hyper-inflations are triggered by collapsed economies that throw in the towel on the people in an effort to repay debts in a currency which the world has rejected.”

A big part of your argument is that we’re close to deflation because the economy is collapsing. But in the quoted line above, you admit that the exact same thing can lead to hyper inflation.

This is why the deflation argument is so weak. As long as the economy is doing fair, and we keep buying junk from our creditors, there is no reason for them to reject the dollar. Its a rickety situation whenever vendor financing is in play, be it at the corporate or national level, but it works until it doesn’t. When it quits working, we’re gonna pay our debts in a devalued currency, or default and lose reserve currency status, which will have the same effect as hyper inflation.

You go on to say “Again, “the prices of things” don’t even tell us anything definitive about whether we’re in a deflation or inflation,…”.
They tell us absolutely nothing? That’s absurd, to use your favorite word, ha ha. If we were in deflation, EVENTUALLY this would manifest itself in the form of lower consumer prices. But, low and behold, five and half years into this credit bust, consumer prices are still rising.

“Despite the repeated calls for hyper-inflation, it has not happened.”
O.k., I’ll admit I should have chosen my words a little more carefully. We’re not in hyper inflation YET, of course, but well on the way.

Look at it this way. Using GAAP accounting, the federal govt. is running a deficit of $6 trillion per YEAR. That’s almost 40% of GDP. It is only going to go higher. How high does it have to go before you’ll admit defeat for your ‘deflation’ prayers? 100% of GDP. 300%? There must be some line where you will admit you are wrong, lol.

September 10, 2012 at 7:09 am #5452

skipbreakfast

pipefit post=5142 wrote: Hi Skip,

I have quite a few problems with your post. Let’s start with this line from you: “Hyper-inflations are triggered by collapsed economies that throw in the towel on the people in an effort to repay debts in a currency which the world has rejected.”

A big part of your argument is that we’re close to deflation because the economy is collapsing. But in the quoted line above, you admit that the exact same thing can lead to hyper inflation. This is why the deflation argument is so weak.

Not exactly. You’re taking only one part of the quoted sentence, and leaving out the key part which is “in a currency which the world has rejected.” You don’t have a hyper-inflation unless world rejects the currency in question. No matter what the economy is doing. A slowing economy is by its nature deflationary. So, no I don’t see how I admit that an economy collapsing is the same thing as hyper-inflation. I believe the opposite: a deflation is the result of a collapsing economy. A hyper-inflation is the result of a political decision of a government to throw in the towel on the currency, leading to worldwide rejection. Our governments are not throwing in the towel on the currency, as is evidenced by treasury rates and flights to safety. You can argue they’re playing with fire, and the bond market could lose faith in the system’s ability to play this game. But so far, we do not see an indication of that. And as all the sources I quote above emphasize, we are actually seeing indications of deflation (a hoarding of currency, etc.) not hyperinflation.

The key part to a deflation is falling money supply and declining velocity of money. There are too many indications that both money supply in the real economy is falling and slowing.

pipefit post=5142 wrote: As long as the economy is doing fair, and we keep buying junk from our creditors, there is no reason for them to reject the dollar. Its a rickety situation whenever vendor financing is in play, be it at the corporate or national level, but it works until it doesn’t. When it quits working, we’re gonna pay our debts in a devalued currency, or default and lose reserve currency status, which will have the same effect as hyper inflation.

Yes, possibly we will eventually have to print to pay our debts one day. There is no indication yet that we are about to do that. In today’s case, Deflation (due to overwhelming economic reality) precedes a hyper-inflation (due to a last-gasp political decision to throw in the towel on the government, the country, the people, the economy and the world). Given that deflation is the imminent threat, you have to survive a devastating deflation before you can survive the possible hyper-inflation in the future.

pipefit post=5142 wrote: You go on to say “Again, “the prices of things” don’t even tell us anything definitive about whether we’re in a deflation or inflation,…”.
They tell us absolutely nothing? That’s absurd, to use your favorite word, ha ha. If we were in deflation, EVENTUALLY this would manifest itself in the form of lower consumer prices. But, low and behold, five and half years into this credit bust, consumer prices are still rising.

I didn’t say they tell us nothing. I said “they don’t tell us anything DEFINITIVE.” That’s a big distinction, pipefit! Too many people do what you’re doing and use basic cost of living prices as a DEFINITIVE indication (ie., air-tight PROOF) of an imminent hyper-inflation. That is absurd. I don’t expect you actually read my long arguments in this regard. Here’s the gist:

I think it’s still important to continually reflect upon the TAE perspective on inflation/deflation. Because the rise in basic costs of living can be a distraction from the much bigger problems we’re about to face. Yes, the problems heading our way are bigger (for most of us in the developed world) than whether tomatoes or toothpaste went up in price this year.

I don’t want to dismiss the impact of rising grocery prices on people’s lives, which especially impacts the poor. When you’re starving, no other issue is more pressing. Nevertheless, a lot of people cite rising grocery costs as proof of monetary inflation (i.e., expanding money supply) with the implication that we are heading towards an inflationary collapse. This is a red-herring. And it’s a dangerous one. Because it tricks us into making the WRONG preparations for what is coming–and what is coming is a deflationary collapse.

For the poor, rising food prices (triggered by many things, like drought, and not necessarily money supply) devastate their lives. It’s unsustainable and leads to riots and malnutrition and worse. However, for anyone who earns or has amassed enough money to pay for food with any money left over, the rising grocery costs factor less and less into your financial equation. For example, tomatoes may rise in price costing you another $100 per year. But if you’re also shopping for a house, the cost of that house is dropping in most places much more than $100 per year. Similarly, prices of things like cars, travel, computers, clothing and services like plumbers and dentists are dropping faster. And these price drops are like dominoes falling throughout our society, as they trigger job losses, business failures, abandonment of infrastructural improvements–basically society breaks down if it goes broke, and when business fails and there are no tax revenues to collect from the people, we’re broke.

pipefit post=5142 wrote: “Despite the repeated calls for hyper-inflation, it has not happened.”
O.k., I’ll admit I should have chosen my words a little more carefully. We’re not in hyper inflation YET, of course, but well on the way.

Look at it this way. Using GAAP accounting, the federal govt. is running a deficit of $6 trillion per YEAR. That’s almost 40% of GDP. It is only going to go higher. How high does it have to go before you’ll admit defeat for your ‘deflation’ prayers? 100% of GDP. 300%? There must be some line where you will admit you are wrong, lol.

Read the sources above. The quantitative easing and debt accumulation is a fraction of what it would need to be to make up for the trillions in vanishing credit-money. Debt write-offs is an indication of vanishing money. I don’t think any government can come up with enough quantitative easing to stem the tide of trillions of defaulted debts. This doesn’t serve the government or the richest interests in our society.

I’ll admit that I’m wrong if it turns out I’m wrong. But I don’t take the increase of some prices as the reason to do so, since no TAE deflationist has ever said SOME prices rising/falling is the definition or the true implication of an inflation versus deflation. The implications of money supply have to be accounted for in a much more complete way, and not just by examining YOUR prices in your daily life shopping for mac and cheese. Ironically, given where we are at in 2012, it is the hyper-inflationists who should concede they might be wrong. Time will tell. At least hedge your bets given the evidence is mounting against the hyper-inflationists all the time.

September 10, 2012 at 2:44 pm #5454

bluebird

@skipbreakfast – thanks for the additional explanations concerning deflation and inflation. good examples that can help people understand these concepts.

September 10, 2012 at 10:19 pm #5456

pipefit

Hi Skip, you wrote “A hyper-inflation is the result of a political decision of a government to throw in the towel on the currency, leading to worldwide rejection.”

The USA government HAS thrown in the towel. Don’t you get it? What else would you call an ANNUAL budget deficit of 35% to 40% of GDP? About $5.5 or $6 TRILLION?!!!

They HAVE thrown in the towel. So, you might ask, ‘why don’t we have hyper inflation, yet’? Simple, because our trade partners would prefer to kick the can down the road via vendor financing, rather than face a deflationary collapse.

See, Skip, I’m not afraid to predict ‘deflation’ when and where it is likely to happen!!! And it will happen to the trade surplus countries. It couldn’t be simpler. Trade deficit countries will devalue, or default (leading to loss of reserve status), and surplus countries will have currencies that strengthen (deflationary).

You’re saying, in essence, that the dollars that China, Japan, etc. hold will INCREASE in buying power (USA dollar centric deflation) the bigger their piles get. That is absurd, to use your favorite word. The bigger their piles of dollars get, the more certain their buying power goes to zero.

What will be the tipping point? That I don’t know. It might be related to the size of their growing piles of gold and silver, or it might be a financial accident of some sort.

September 11, 2012 at 5:56 am #5463

Golden Oxen

@ pipefit A good strong bout of hyperinflation would probably end the entire fairy tale rather quickly. Just one of many possibilities; that peaceful loving Middle East area comes to mind quickly, as well as the financial horror that Japan has become. It is a long list of possibles, very long.

September 11, 2012 at 6:14 am #5464

SteveB

pipefit post=5147 wrote: The USA government HAS thrown in the towel. Don’t you get it? What else would you call an ANNUAL budget deficit of 35% to 40% of GDP?

I won’t speak for Skip, but here’s what he wrote earlier that addressed that question pretty clearly:

skipbreakfast post=5140 wrote: It’s important to keep in mind that hyper-inflations are not triggered by efforts to stimulate economic recovery and create jobs, the way Bernanke is attempting to do. Hyper-inflations are triggered by collapsed economies that throw in the towel on the people in an effort to repay debts in a currency which the world has rejected.

Maybe “extend and pretend” is (still) the appropriate term.

September 11, 2012 at 5:27 pm #5471

pipefit

Hi Steve. He addressed my point in a very incomplete way. The ANNUAL federal budget deficit, using GAAP accounting in $5 or $6 TRILLION. Sure, some of that is to create jobs and stimulate the economy. Some for the military industrial complex.

But the vast majority is accounting entries that exist because the government is defaulting on its legal obligations toward the huge entitlement programs. Got that, ‘entitlement’, lol. That means that the American people are ENTITLED to their social security and medicare benefits, and the government is short many trillions, and adding to the shortfall by several more trillion every year.

There is no way in heck that this deflationary. There are two possible outcomes. The obvious one is that the money to pay these REQUIRED benefits is created out of thin air, which is hyper inflationary.

The other is to default. This will quickly lead to anarchy and the failure of the state, and its currency, another form of hyper inflation. You cannot terminate the largest pension plan and health care plan and maintain the present order. The economy is too dependent on them. Also, it would be politically impossible to do so anyway. They will chip away at the military industrial complex before they touch ss or medicare in any significant way.

September 11, 2012 at 7:16 pm #5472

SteveB

pipefit post=5162 wrote: There is no way in heck that this deflationary. There are two possible outcomes. The obvious one is that the money to pay these REQUIRED benefits is created out of thin air, which is hyper inflationary.

Hi Pipe,

The unaddressed question is, “When”? Your case would likely be for “sooner” and Skip’s would likely be for “later, after deflation”. The latter is my own guess since those “entitlement” costs aren’t all due immediately.

September 11, 2012 at 9:50 pm #5476

pipefit

Hi Steve–Your guess is as good as mine, I suppose, lol. But we’re 5.5 years into the credit bust, and consumer prices are still rising at a fast clip, certainly faster than interest rates. It is awfully hard to argue ‘deflation’ in a negative interest rate environment.

So I think you are engaging in more wishful thinking than using concrete analysis. Social Security hit an important inflection point a couple of years ago. Instead of s.s. tax receipts exceeding benefit payouts to retirees, we have now flip flopped, and money must now be pulled out of the general fund to cover past borrowings from the s.s. trust fund. That sounds a heck of a lot more like hyper inflation than deflation to me, BWTFDIK, lol.

Again, as I said in a prior post, you deflationists can argue that the fed. govt. does a straight up default on the entitlement trust funds, but I’m 99% certain that we would get a fascist coup first. That, in turn, would mean the loss of reserve status for the buck.

Following a fascist coup, I’ll concede that there could be a small window of deflationary action, quickly followed by loss of reserve status for the dollar, then hyperinflation. You’re kind of nitpicking with these small windows of time, though. I think it is pretty obvious that the preponderance of the evidence points to dollar collapse, regardless of whether it strengthens for a year or two along the way.

September 11, 2012 at 11:59 pm #5477

skipbreakfast

pipefit post=5162 wrote: Hi Steve. He addressed my point in a very incomplete way. The ANNUAL federal budget deficit, using GAAP accounting in $5 or $6 TRILLION. Sure, some of that is to create jobs and stimulate the economy. Some for the military industrial complex.

But the vast majority is accounting entries that exist because the government is defaulting on its legal obligations toward the huge entitlement programs. Got that, ‘entitlement’, lol. That means that the American people are ENTITLED to their social security and medicare benefits, and the government is short many trillions, and adding to the shortfall by several more trillion every year.

There is no way in heck that this deflationary. There are two possible outcomes. The obvious one is that the money to pay these REQUIRED benefits is created out of thin air, which is hyper inflationary.

The truth is that there is no more complete way one can answer your critiques in the comments of someone else’s blog. A deflationist blog, I might add. In fact, the strongest arguments against your points are all thoroughly covered in Stoneleigh’s and Ilargi’s lengthy, rock-solid essays now archived in the Primers. The reason I like to participate vocally in TAE’s comments is that these writings influenced my thinking a lot, and led me to research the thoughts of other deflationists (as well as hyper-inflationists).

It has been a “long road” since the 2008 credit crisis. The irony, however, is that I see the deflationists’ predictions playing out extremely faithfully, while the calls for hyper-inflation have simply not materialized in any respect. One to 3% consumer price inflation is NOT hyper-inflation. An expanded government debt is not hyper-inflation (even if it’s a bad thing)–especially given that safe-haven interest rates are at all-time historical bottoms. That is the OPPOSITE of a hyper-inflation.

I’m looking at the best arguments and the best evidence. I don’t discount a hyper-inflation in the future. But our deflation hasn’t even gotten fully rolling yet, so that is my primary concern. When most peoples’ wealth is still tied up with houses and stocks, it is the most critical message I personally want to get out there. Not to mention the fact that people will have a lot of trouble making ends meet when jobs vanish increasingly fast, and investments vanish too. I’d want to have cash. Hyper-inflation is a dangerous all-in bet that could result in more than financial disaster for the average person who tries to protect herself with speculative assets, all of which do go down in the worst of a deflation.

So, again. I can’t convince you pipefit. I’m not trying to actually–if Stoneleigh hasn’t convinced you to open your mind to the possibility of deflation, after you have read and posted on TAE the past months (years?), what hope do I have. I’m trying to provide some alternative perspective to anyone ELSE reading your comments, so they maybe stop to think to explore the possibility there will probably be a different kind of financial disaster awaiting us. Too much of what the deflationist perspective has warned us of is coming to pass. just look at the increasing difficulty that the Fed has in coming up with their QE-Anything, something many deflationists predicted would happen long before they managed to print us into oblivion.

Here are just a few of the primers from Stoneleigh and Ilargi. I also encourage you to read Robert Prechter’s work. If they can’t convince you, then I certainly cannot, and I shouldn’t really bother trying when i can just refer you to their superior writings and work.

http://theautomaticearth.com/Finance/dollar-denominated-debt-deflation.html

http://theautomaticearth.com/Finance/debunking-gonzalo-lira-and-hyperinflation.html

http://theautomaticearth.com/Finance/the-rise-and-fall-of-trade.html

http://theautomaticearth.com/Finance/the-infinite-elasticity-of-credit.html

http://theautomaticearth.com/Finance/a-future-discounted.html

http://theautomaticearth.com/Lifeboat/our-daily-bread-or-not-as-the-case-may-be.html

Cheers!

Skip

September 12, 2012 at 12:17 am #5478

Golden Oxen

Robert Prechter, You must be joking skipbreakfast. Gold was supposed to be under 200 now, according to that mystic, and we entered a deflationary bust about 1980 according to him and his silly waves. Please come up with someone that has given the correct time of day sometime in the last few decades. Thanks

September 12, 2012 at 12:21 am #5479

skipbreakfast

Golden Oxen post=5169 wrote: Robert Prechter, You must be joking skipbreakfast. Gold was supposed to be under 200 now, according to that mystic, and we entered a deflationary bust about 1980 according to him and his silly waves. Please come up with someone that has given the correct time of day sometime in the last few decades. Thanks

No one I know yet has a perfect batting average…especially about timing. Prechter admits his timing is bad. Everyone’s timing has been bad, to be honest (except those who continue to follow the status quo and assume everything is fine and will soon be better and bought Apple stock–in fact, by the numbers, their timing has been flawless the past twelve months…but I am not listening to them!).

I don’t think you should discount the brilliant insights of Prechter. At least you do so at your peril.

The fact gold is up is just one of infinite investments one might make. Many other investments are down. Gold can go up or down too. One investment call does not discount the life’s work of a brilliant man. And I expect he will be proven right about gold, even if gold doubles again before it crashes. I’m only interested in playing gold to the extent I can afford to lose a good chunk of the money I’m playing with.

As for Prechter having the “right time of day”–have you read his early predictions of how Fed monetization will play out? In this respect, his writing from circa-2000 sounds like he time-traveled ahead 12 years. If you’re looking for amazing predictions, I find them there in his writing.

September 12, 2012 at 12:21 am #5480

SteveB

pipefit post=5167 wrote: Hi Steve–Your guess is as good as mine, I suppose, lol.

Yes, every thought about the future is a guess (and a lie).

pipefit post=5167 wrote: Following a fascist coup, I’ll concede that there could be a small window of deflationary action, quickly followed by loss of reserve status for the dollar, then hyperinflation. You’re kind of nitpicking with these small windows of time, though. I think it is pretty obvious that the preponderance of the evidence points to dollar collapse, regardless of whether it strengthens for a year or two along the way.

It only takes a day for assets to lose most of their dollar value. I don’t much care whether it’s a year, two, or just a few months. Referring to the pointing to and preparing to traverse the potential chasm as nitpicking seems oddly minimizing and potentially risky, depending on what actions follow those thoughts.

September 12, 2012 at 12:26 am #5481

Golden Oxen

Reply@ skipbreakfast, I know, he is just thirty years too early. It is the line they all use rather than admit they were conned. You are correct about one thing however; he will be right some day.

September 12, 2012 at 12:30 am #5482

skipbreakfast

Now you’re just being disingenuous, GO. 30 years too early about what? 30 years ago, Prechter became famous for predicting the biggest bull run in stock markets of all time…when everyone said they were finished. He was right. He got rich. And he has more life yet in his insights into how markets work. More insight than you and I have. Certainly more insight than the “buy gold bitchez” crowd.

Prechter was early in predicting a credit crisis. Anyone who lost everything in 2008 would have done well to heed his “early” call.

He also predicted the post-2008 stock market rally. He believes the stock market rally has topped again.

His best advice? “Panic early!” He’s said that, and I agree.

September 12, 2012 at 12:40 am #5483

Golden Oxen

Speak for yourself skip, more insights than you have for sure, but not me. Should find yourself a hero that it isn’t a double talking con artist that points at road maps for idiots he calls waves. It would also be preferable that he had more than one correct call about market direction in thirty years. Especially where it can only move two ways. Try Jim Grant, Jim Sinclair, Richard Russell, James Turk, Alan Newman, to name just a few.
They admit mistakes and move ahead.

September 12, 2012 at 12:48 am #5484

skipbreakfast

I just mentioned two major market calls Prechter has made. I couldn’t count the hundreds of other calls that may have been right in the intervening years. Anyone making that many calls won’t be right 100% of the time, especially about timing. No one here at TAE is that interested in timing, but rather in the macro view which will have the most impact on anyone who is not a trader. Those two calls made by Prechter are just the most extreme in their degree that they were correct, because the markets themselves were so huge. I’m happy to speak for myself, GO–thanks for allowing me that. As for you: what great insight do you have in published form I can benefit from? Other than your buy gold bitchez posts?

September 12, 2012 at 1:10 am #5485

Golden Oxen

@ skipbreakfast Mail me a check for $495.00, and I will mail you my current insights. You seem to be already familiar with my earlier correct masterworks of market insights. That is a 6 month subscription by the way, not refundable. I will also accept 1 dozen silver eagles as payment which is a discounted price for real money. Disclaimer, Golden Oxen’s past insights while totally correct are no guarantee that they will be so in the future. Past performance is no guarantee of future performance and a genius such as GO has been known to be decades Too Early in his usually correct forecasts.

September 12, 2012 at 4:15 am #5498

pipefit

skip–You guys should not lean too heavily on Pretcher. Yeah, he’s a deflationist, a perma deflationist at that, so you all love him. But he’s mainly a technical analysis kind of guy, while TAE is mainly fundamental analysis. Pick your poison and stick to, or you’ll get hopelessly muddled.

E-wave works in some situations and doesn’t in others. The S&P 500 just broke north, nullifying a potential double top, and sending E-wave deflatioinists into their chart rewriting caves. However, if you realize that gold and silver are real money, and you enter the following charts at stockcharts.com ($spx:$gold and $spx:$silver) (3 full years of chart data), you can see what you deflationists already know. Namely, that the markets are in huge trouble, currently down almost 45% over the last 2.5 years, in silver terms.

So yes, from the vantage point of real money, there is a horrible deflation ravaging the country, and the stock market is in free fall, even though in dollar terms it looks healthy. Analysis is so much easier when you what is real money and who is pretending to be money, lol.

September 12, 2012 at 4:32 am #5500

skipbreakfast

pipefit post=5189 wrote: skip–You guys should not lean too heavily on Pretcher. Yeah, he’s a deflationist, a perma deflationist at that, so you all love him. But he’s mainly a technical analysis kind of guy, while TAE is mainly fundamental analysis. Pick your poison and stick to, or you’ll get hopelessly muddled.

To clarify, you should really just say “you” rather than “you guys should not lean too heavily on Prechter.” I’m not TAE. I have no official affiliation with TAE, while I do support TAE, because I simply find the insights and writing here to be amongst the most sound in the gawd-forsaken land of the Internet (or the printed press for that matter). A couple of my comments have struck a chord with Ilargi, and he made them bigger topics of conversation. But truthfully, so far, I am a commenter here because there are relatively few places to speak intelligibly about deflation. There are many places to speak unintelligibly about hyper-inflation. And so my “reliance” on Prechter is my own, and I think I’ve only ever seen him referenced by Stoneleigh once within all of her myriad articles with thousands of references.

I personally maintain that Prechter has many incredible insights. I don’t rely on him for the entirety of my life. I don’t rely on anyone to that degree. I suggest reading him and taking the best of his incredible insights. I’ve even disagreed with points on TAE in the past, though my convictions seem to remain very much in alignment with much that I’ve read on here.

I’m not a trader these days, so I don’t rely on technical analysis either. I am persuaded that business is cyclical though. That is just as influenced by Minsky as Prechter. And as such, we’re headed for a doozy of a dip in the next cycle.

September 12, 2012 at 6:15 am #5502

pipefit

skip said, “I am a commenter here because there are relatively few places to speak intelligibly about deflation.”

Gold only needs a 10% advance from here to take out the all time high dollar price for the yellow metal. The only intelligent comment to make at that point (in a few months) will be ‘I was hopelessly wrong, and pipefit and G. Oxen were right’, lol.

Of course there is free speech in this land, for now, so you will have the option to say something not so intelligent, regurgitated from the broken clocks around here. Why not think for yourself? Are you going to follow them off the dollar collapse cliff, come what may?

September 12, 2012 at 6:34 am #5504

skipbreakfast

pipefit post=5193 wrote: skip said, “I am a commenter here because there are relatively few places to speak intelligibly about deflation.”

Gold only needs a 10% advance from here to take out the all time high dollar price for the yellow metal. The only intelligent comment to make at that point (in a few months) will be ‘I was hopelessly wrong, and pipefit and G. Oxen were right’, lol.

Of course there is free speech in this land, for now, so you will have the option to say something not so intelligent, regurgitated from the broken clocks around here. Why not think for yourself? Are you going to follow them off the dollar collapse cliff, come what may?

Hm, as for thinking for myself, honestly hyperinflations, or at least serious inflationists, definitely are the majority opinion in the collapse blogosphere–or at least they WERE the majority, because I’m seeing a lot of capitulation from the hyperinflationists lately. A lot more talk of imminent deflation.

I’m not saying there isn’t anything valuable in the conversation about what a hyperinflation is, how it would unfold, and what conditions are currently in place to allow for it. But I don’t see how you aren’t just regurgitating the same thing.

There are special merits to gold. Every deflationist worth her/his salt recognizes them. Prechter calls gold the “only real money”. But the fact that gold is climbing in price again does not signal the same thing as hyperinflation. Just because a speculative asset overtakes a high does not change anything. It is one speculative asset. In a true hyperinflation, any asset is worth more than the rejected currency. From that point of view, a hyperinflationist would be wise to diversify and buy everything including gold. So houses, stocks, cars, stamp collections, bicycles. They’d all be worth more than the debauched currency.

So, no, gold hitting another high, if it does so, has no bearing on my belief we’re heading into deflation. Interest rates and money supply, liquidity and credit creation, salaries rocketing up–those would have a bearing on my decision. Gold going up, Apple stock going up, fine art going up–these are assets that taken in isolation do not persuade me one way or the other that we are not in a deflation.

ADDENDUM: by the way, I’ve called for a possible $2500 gold price months ago here in TAE comments. That’s on record. It doesn’t change my point of view about deflation. It’s simply a call about credit-money chasing desperately-needed returns. Returns are needed from somewhere, and as Soros (a recent gold-buyer) has said, money is made from bubbles. He also recognizes that bubbles pop.

September 13, 2012 at 4:30 pm #5515

Jack

From the logical point of view gold does seem like it will go up and when the prices start rising than you have more people becoming gold bugs.

At the same time there are many prominent people like Steven Keen saying that it is a gamble.

http://en.wikipedia.org/wiki/Gambling

September 13, 2012 at 5:38 pm #5516

pipefit

Hi Skip–I’m not regurgitating anything. But I would argue that a higher gold price is a signal of inflation, not deflation. Maybe even coming hyper inflation.

Here’s where I think you are making your mistake, if, in fact I’m right, lol. (see, I’m not one of those chest pounding morons, lol)

You deflationists seem to think that once you have established a linear or even exponential equation, you can extrapolate it far into the future or far along the ‘x’ or ‘y’ axis.

Look at this way. A company plots the height from which a worker falls vs. health care and workers’ comp. costs. From 3′, there is frequently no injury and an average cost of $100. From 6′ there are sometimes broken bones, so the average cost is $1000. From 9′, multiple injuries, so $5000 average. From 15′, avg. $20k. 18′ we’re getting into head injuries, and long hospital stays, so $100,000. Finally, at some height, the average cost is in the millions because of comas and other expensive surgery.

But what happens at some key inflection point, maybe 50′? Everybody dies and health care and workers’ comp. costs go to zero per person. Sure there are death and dismemberment costs, but that is paid out of a separate fund, and they are fixed, never rising with a change in height from where the worker falls. (let’s assume no company negligence, only worker stupidity).

So my argument is that in terms of the debt pile, we long ago passed this inflection point. There won’t be any deflation, because when it collapses, if it collapses, we get a complete melt down followed by anarchy or a Stalinist type controlled economy with a new money, maybe gold. So what if your dollars are worth more for a few days or weeks. That won’t save you. Think how fast everything will unravel.

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