Mar 042013
 
 March 4, 2013  Posted by at 11:59 am Finance


Ilargi: I received another entry from Dave Fairtex, who delves into Spanish housing data this time around. We had a nice discussion about it, since I question some of the assumptions on which he bases his interpretation of the data. In particular, I think Dave assumes 2 things:

1) That, during the – ongoing – bust, Spanish home prices will fall to the level they were at when the boom began (a drop of 55%), and then stop falling right there.

2) That there is a bottom underneath prices, determined by their "utility value", i.e. people will always need to live somewhere.

As for 1), it immediately makes me think of a series of 3 graphs we use in Nicole's presentations, and which those of you who have acquired our DVD set "A World of Change" will readily recognize:

 

 



What you see is that in these 3 crises, the end point is (way) below the starting point, due to what can be called the "undershoot". In each case, it makes prices fall by well over 90% of its peak level. Now, Dave says he thinks homes are not tulips,

and so 2) the utility value of a house will make sure prices won't fall below the point their boom started. Not only do I find this too arbitrary an assumption (though, granted, in Dave's view he derives it from his data), there are a few other things that I feel may well influence this. That is, Spain built a huge amount of homes (more than Germany, France and Britain combined for 10 years), of which many are of too poor a quality to last for more than 20 years.

Moreover, something is true in Spain as it is all over the west: compared with 50 or 100 years ago, we occupy far more square meters per capita. That means there's a potential elasticity in that if prices remain too high, people will – forcibly – move (back) in together with family. Because we can. Demand is not what we want, but what we can afford. Seeing that youth unemployment in Spain presently stands at some 60%, you really need to wonder who's going to buy any homes there at all in the near future, and hence what bottom is supposed to apply to this housing market. It's tempting to think things must normalize at some point, but Spain has a crisis that extends far beyond housing.

I think we too easily overlook the potential for self-reinforcing, positive feedback across an economy. If Spain were to recognize the full 55% price drop, that would be the end of a large part of its banking system. And that in turn, for instance, would drive prices further down.

If the government in Madrid were more pro-active in restructuring the debts its banks hold, we would at least have a more accurate picture, but Spain does as the rest of Europe does: hide the debt behind more debt. The $25 billion loss announced by government-owned Bankia this week is a sign of what's going on behind the curtain, but no more than that.

Here's Dave and his data:


 

Dave Fairtex:

It is relatively well known that Spain has issues with their banking system, and that there was a property bubble and it popped several years ago. Various estimates have been floated as to how much it will cost to resolve the problem. But determining cost is not the only interesting question.

We want to be able to answer four questions:

• How much will it cost to resolve the problem?

• How long will it take to "return to normal"?

• How will we know when "normal" has been reached?

• What effects might this process have on spanish society?

The Bubble

It has been said that during a bubble pop, pricing always returns to its place of origin. This makes sense, as the prices one pays for something, once bubble psychology is removed from the equation, is tied to the actual utility received from having the item. That level is most likely the point at which prices diverged from the norm.

So, the first step in determining the cost involves identifying the point of origin of the bubble. Viewing a Spanish property price chart, one might argue that Spain's bubble started in approximately 2002. The start date is a relatively arbitrary designation – I picked a date when the trend of property price increases started to become particularly steep.

[Instead of using nominal prices for homes, I considered using real prices – i.e. prices deflated by the CPI. Then I concluded that the inflation that occurred on the way up would most likely be balanced by deflation on the way down. I am not sure this is true, but its one of the assumptions I made.]

 


Spain Res RE Prices

So where are we now? Doing some quick math on this index provided by the Spanish Ministerio de la Vivienda it appears that home prices are down 27% from peak. However, anecdotal evidence from 2012 suggests property prices are closer to 35-40% below peak, and recoveries from foreclosure sales by a Spanish bank in 2012 show a 53% recovery rate – a 47% drop.

So let's say the preceding chart is not telling us the truth or if we're kind, we can say it lags substantially behind realtime. Likely instead of 73, it should probably be reading around 60. Operating under the assumption that prices will eventually return to around 45, that says prices are going to be off around 55% from peak when all is said and done. From a property pricing standpoint, we have another 33% left to go (60 to 45 = 33% drop from here). Perhaps the real price correction will end somewhere in mid 2014.

 


Spain Res RE Prices, adjusted

Resolution Cost

In looking at a property bubble, both the gains AND the losses are not confined simply to the homeowner and the mortgage lender. Developers, architects, builders, laborers, and bankers all benefit during the bubble years and suffer after the pop. Yet to examine effects only to those directly affected understates the the multiplying effect on income that the bubble provides. Each beneficiary buys things from other areas of the economy using consumer credit, takes out mortgage loans, companies takes on corporate debt to expand business, materials are extracted and shipped – all based on the phantom income derived from mortgage-bubble created money.

In order to come up with an amount to approximate first the gains, and then the losses due to the bubble, I decided on a simple approach – to use the amount of outstanding bank loans during the bubble years as a proxy for the overall impact of economic activity from the bubble, under the theory that credit money expands as economic activity expands.

In Ireland, where according to my estimates about €440 billion of "bubble loan money" was created, the government eventually spent €143 billion to rescue their banks and buy up (and overpay for) bad loans. So that €143 billion comes to 32% of the total bubble money created. It is entirely possible costs will rise in Ireland, but this number gives us a starting point for the explicit costs to the sovereign.

 


Ireland Bank Loans, creation

Totaling the bank loans made in the private sector, Spain created about €1.44 trillion in new bank credit during their bubble phase. [note: ECB data only goes back to 2003, so I had to estimate the amount bubble money created in 2002 to be about €100 billion.] If we assume the ratio of costs will be similar to that of Ireland, 32% of €1.44 trillion ends up being €460 billion – half for capital injections, and half for the Bad Bank.

 


Spain Bank Loans, creation

To date, Spain has allocated €32 billion to their Bad Bank [Banco Malo] and an as of yet undetermined amount to their bank rescue/capital injection program. To put it mildly, this doesn't seem like nearly enough.

But is €460 billion the right amount? That's open to debate. It might be more.

A recent corruption scandal in Spain has resulted in PM Rajoy's popularity dropping – a recent survey had 85% of those polled having "little or no faith" in him. His party (the PP) had a 24% support rating, the lowest on record.

Why talk about corruption in a finance discussion? Well, corruption matters a great deal in these affairs – the managers of a Bad Bank have a lot of money to spread around, well-connected bankers have a whole lot of garbage assets they'd love to get rid of for as high a price as possible (and in fact their jobs DEPEND on them selling their garbage for as high a price as possible), and so the risk of overpayment for bad assets increases right along with the level of corruption. The more public money that gets dropped on the banks, the better condition the banks will be in – for paying salaries, bonuses, dividends, and so on, and the smaller the losses will be for bank shareholders and bondholders.

I assert that corruption is likely to raise the cost of the bailout, since the amount of public money that will be funneled to the bank will be maximized in a corrupt regime. I don't think the cost will be any lower than €460 billion, and Rajoy himself once mentioned the figure €500 billion as being required for a complete bank rescue. I do not think that was a number idly constructed from thin air. What's more, I believe that the folks at the Spanish Central Bank and the ECB are not fools. They've done the same math that I have, and Rajoy's remark was simply a political shot across the bows of the ECB in the negotiations over who pays what; a form of "don't mess with me or else the game is up."

It reminds me of the old saw – owe the bank 1000 dollars, the bank owns you. Owe the bank a billion dollars, and you own the bank!

That's all just speculation on my part, but I find it interesting that my math adds up to approximately Rajoy's threat. It wasn't intentional, but that's what came up.

So I believe that €500 billion is a good guess.

How long to return to normal?

The property bubble is over from the standpoint of pricing when property prices return back to their point of origin. (Its quite possible prices will overshoot as well, but lets leave that out of the discussion for now). It would seem that this might complete within the next year or two.

However calculating when the economy will "return to normal" is another matter entirely. Monetary deflation from the bubble sometimes continues long after prices have retraced. This is for several reasons, all of which have to do with the speed at which losses are recognized, as well as the level of debt forgiveness in the economy in question.

Hyman Minsky had a model where he attempted to explain the anatomy of a bubble through finance. In his model, there were three types of borrowers:

• Hedge Borrowers, whose debt repayments (principal, interest, taxes, expenses, etc) could be covered by the economic activity provided by the investment.

• Speculative Borrowers, whose investments could only cover the interest payments, and relied upon capital appreciation (bubble effects) to make up the difference.

• Ponzi Borrowers, whose investments could not even cover interest payments, and relied entirely on capital appreciation for the loan to make economic sense. Many of the subprime/neg-am borrowers fell into this last category.

The first phase of a pop involves rapid deflation, as corporations and finance organizations who were Ponzi and Speculative borrowers and who may legally walk away from their loan obligations do so relatively rapidly – taking perhaps 2-4 years. From the Ireland bubble charts, it seems that corporations bail out faster than the finance borrowers. Of course this depends on the willingness of the banking system to recognize the losses. "Extend and pretend" strategies drag this process out.

 


Ireland Bubble Loans

[Note: above chart is an attempt to show the "bubble loans" rather than the total bank loans for the period in question, in order to better compare the different sectors and how much money was created (borrowed) by each one relative to the others]

Losses tend to be the highest for these two types of borrowers; they are the least able to pay, have no money down, and have collateral whose value is entirely based on the former trajectory of bubble pricing. And they can legally walk away. And historically, they do.

Bad Banks tend to buy mostly these sorts of loans, and they have recovery rates that are much lower than those from foreclosed homeowner properties. You can see why – dubious assets such as unbuilt land bought with borrowed money at the top of the bubble is unlikely to have much value once the bubble pops.

The second phase involves hedge borrowers who can actually make the payments but do not want to lose the overvalued asset. By law and custom, regular people are much less willing to simply walk away from an investment gone bad. And in the case of both Spain and Ireland, full recourse laws require a homeowner to continue to make payments regardless of how underwater the homeowner is.

This second phase is also intrinsically deflationary, although the pace of deflation is much slower. In the credit model, money is created when a loan is taken out, and money is destroyed slowly as the loan is gradually paid back or rapidly when the loan is defaulted upon.

After a bubble pop, underwater homeowners are stuck until they pay down enough debt to restore their equity position. This act of slow debt paydown slowly destroys credit money, causing steady monetary deflationary pressure throughout this second phase. Although I have not done the research necessary to back this up, it is my speculation this is what caused the "lost decade" (or two) in Japan – the slow but steady monetary deflationary pressure from gradual debt paydown.

In Ireland, it has been estimated that underwater homeowners will need until 2020 for the bulk of them to get out of negative equity situations – and that is for those who put 20% down. For those who put 0% down and who by law cannot walk away, they will be at it until 2025. This is how long mild deflationary pressures will likely last in Ireland, assuming no changes to the law. In this, Spain is likely to follow Ireland.

The first deflationary phase is steep, lasting perhaps 3-4 years, while the second phase is more shallow and lasts from 8-14 years following, depending on the size of the bubble, as stuck homeowners and corporate hedge borrowers rebuild their equity positions by gradually paying down debt.

Estimating timeline for return to normalcy

We make an assumption that in addition to prices, all the outstanding bank loans that were based on bubble activity will also retrace back to its original starting position – back when the debt was sustainable and justified by steady-state economic activity. As all that unsustainable debt gets defaulted on or paid back, it will vanish.

Graphically, we can track where things are by looking at the outstanding amount of bank loans. In Spain, it is at €1.89 trillion, down from €2.26 trillion at the peak, but it needs to return to about €800 billion before the deflation has run its course. In Spain, it would appear that the first corporate deflationary impulse is in the process of happening now, although it would appear that the Spanish banks have been slow to acknowledge the losses. Based on the Irish experience, it probably has another 2 years to run, assuming the banks are actually required to take their losses.

In some sense this is a moral tale. Corporations get (debt) forgiveness, but in Spain and Ireland regular people don't. This lack of (debt) forgiveness is why the second phase of a deflationary bubble pop will last a long time: it takes people a long time to pay down all that debt. So forgiveness, in addition to it being a Christian virtue, allows things to return to normal more rapidly.

So where are we in Spain? It is just starting to happen seriously, 5 years after the peak in prices. And without changes in the law, it's going to last a very long time.

 


Spain Bank Loans Remaining

Painting: Pablo Picasso Bullfight: Death of the Torero 1933

 


Home Forums Spain Has A Long Way To Go Down

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  • #7083

    Gravity
    Participant

    Gravedad es un algoritmo recursivo.

    #7085

    TheTrivium4TW
    Participant

    Viscount St. Albans post=6773 wrote: Why is the stock market making all-time highs?

    My short positions are hemorrhaging. I’m going to bleed-out if this keeps up.

    How can everything be so bad if the market is so good? Is Stoneleigh going to update things sometime? At some point, the disconnect is so blazing hot, your brain gets third degree burns just for thinking in the gutter.

    I look around and I see cars accelerating, and I hear jets soaring overhead, and I smell burgers and steaks sizzling at the cafes. I pinch my skin and I learn two things: I’m getting fat and no, I’m not dreaming.

    I’ve started watching Jim Cramer again.

    Dear Viscount, the market is going up because that is the direction that will inflict the most pain on everyone outside the inner party.

    Completely wipin gout the shorts usually precedes wiping out the longs when the bubble collapses.

    One fundamental reason why stocks might do better than some would otherwise expect is because ObamaCare was written to eliminate corporate healthcare and pass it off on to the citizen. All that corporate money spent of healthcare now will be pure gravy for the corporations in the future.

    #7086

    TheTrivium4TW
    Participant

    pipefit post=6779 wrote: Viscount asked, “How can everything be so bad if the market is so good?”

    Because we’re in a hyperinflationary depression. Bought any groceries lately, or anything else for that matter. Notice how the packages are smaller and the prices are higher? This is the logical outcome of unrestrained money creation by those in charge.

    For the fiscal year ending 9/30/2012, the federal govt. ran a GAAP budget deficit of $6.9 trillion. That’s about 40% of GDP. Money creation in the extreme.

    Why should China call us out now? We’re suppressing the price of gold, enabling them to get in cheap. When the time is right for them, they will dump the dollar, don’t ask me when.

    The second chart of credit and monetary aggregates belies your hyperinflationary thesis…

    https://market-ticker.org/akcs-www?post=218297

    Reported monetary and credit aggregates are **barely** above the 2007 high and there is probably a few trillion “mark to myth” fraud propping the number as high as it is.

    Prices are going up because trillions are being directed the mega banks so they can gamble on food stuffs. This is nothing new, Andrew Jackson had to deal with the criminal banker cartel doing the very same thing in his day…

    “Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank [updated to tax payers now]. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out!”
    ~From the original minutes of the Philadelphia committee of citizens sent to meet with President Jackson (February 1834), according to Andrew Jackson and the Bank of the United States (1928) by Stan V. Henkels – online PDF

    It wasn’t hyperinflation back then and it isn’t now. Hyperinflation will only occur if it benefits the criminal money defining/government loaning class and not one iota before.

    #7088

    TheTrivium4TW
    Participant

    pipefit post=6784 wrote: It is a lot easier for the fed to just print $85 billion a month, and for Congress to deficit spend $7 trillion a year.

    pipefit, this logic is where you jump the track, IMHO.

    How to be a Crook

    https://www.youtube.com/watch?v=2oHbwdNcHbc

    It isn’t about “ease,” it is about the people that control the Fed maximizing the profits for themselves and those interests they control.

    The corporat emandate is simple – maximize profits. While they don’t teach you this truth in business school, this is equivalent to maximizing debt throughout the rest of society.

    Since debt is the banker product, its widget if you will, that means every corporation in the world’s mandate could properly be stated thusly, “maximize banker widgets.”

    The Matrix just glitched for those who are paying attention.

    So the question, when properly stated, is… what course of action will maximize the real wealth of the interests that control the Fed.

    The government does not control the Fed. The Fed is privately controlled by the interests that defined money, created the Fed in the first place and now lend trillions to governments.

    https://www.youtube.com/watch?v=ol3mEe8TH7w

    Napoleon figured out WHO was in control when governments servilely had to plead with bankers for access to money:

    “When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
    ― Napoleon Bonaparte

    So. “Money,” as Napoleon called them, have trillions in debt instruments and trillions more in cash. “Money” controls the actions of the Fed and will direct monetary policy.

    “If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”
    – Robert Hemphill
    Credit Manager of Federal Reserve Bank, Atlanta, Ga.
    In the foreword to a book by Irving Fisher, entitled 100% Money (1935)

    Your thesis is that “Money” will hyperinflate their trillions in wealth away because it is “easy” and “Money” wants to please government workers with paychecks.

    I have news for you, “Money” has no motherland and no affinity towards government workers. Their sole object is gain for themselves AND HYPERINFLATING THEIR WEALTH AWAY IS CONTRARY TO THEIR PSYCHOLOGICAL MAKEUP.

    So, what will they do?

    When their current “looting phase” [steal trillions in the asset “face” of money while offloading trillions in the liability face of money to sucker tax payers], they will restrict credit.

    As Hemphill made clear, this will cause America to “starve,” forcing many into bankruptcy.

    This will accomplish the following for the money definers/creator class:

    1. Their debt paper will be turned into actual real assets. They get the house, the farm, the business, etc… based on money they created from nothing and then lent it into society.
    2. Their non TBTF&Jail competition is wiped out enshrining themselves as monopoly power.
    3. The prices within society collapse and their trillions in looted cash will then buy up 3 or 4 10 times more physical goods while Americans are eliminated from demand side competition as they starve.
    4. The “government,” or, more accurately, wolf bankster operatives dressed up in government sheep outfits, will usher America into receivership for the benefit of the Debt Money Tyrants – the people who defined money as debt and then let it do what it always does, which is covertly and systematically asset strip society and transfer the wealth of society to the financial fraud “Money” class. Why do you think the police state has been financed by the Fed? Why do you think Congress declared America a battle field? Why do you think DHS has orders to buy 2 billion bullets, at least 450 million of which are hollow point and not used for practice because they are expensive? Why do you think DHS has ordered “no hesitation” shooting targets of children, pregnant women, grandma and grandpa types?

    Oh, you probably don’t believe the last one, do you. Truthfully, you shouldn’t believe anything anyone says, you should gather the data yourself and identify contradictions and fallacies and then remove them – hence my nick name here on these forums.

    https://www.infowars.com/company-behind-shooting-targets-of-children-received-2-million-from-dhs/

    How about re-education camps in America – they even use the Soviet authoritarian dictatorship term and throw it in your face.

    https://www.infowars.com/leaked-u-s-army-document-outlines-plan-for-re-education-camps-in-america/

    5. Sets the stage for the Biggest Finance Capital cabal of money definers and nation state money creators to seize possession of the physical world and then hyperinflate to “balance their books” and proclaim that “capitalism failed, you need to be ruled byu the private international banking cartel [that destroyed your country, but the average person won’t figure it out].”

    “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. The one aim of these financiers is world control by the creation of inextinguishable debt.”
    ~Henry Ford

    I apologize about the length of this post, but the topic is of extreme importance and all the data presented is relevant and important to making the argument.

    #7089

    TheTrivium4TW
    Participant

    Beppe has a good understanding of Debt Money Tyranny.

    https://www.youtube.com/watch?v=eyCpidT53nY&feature=player_embedded#t=177s

    This Is Why Central Planners Are So Scared of Italy’s Beppe Grillo

    https://www.zerohedge.com/news/2013-03-10/why-central-planners-are-so-scared-italys-beppe-grillo

    Beppe’s critical tone towards Debt Money Tyranny puts him at risk – if he has a sudden heart attack or if some three named assassin takes him out, well, what’s new?

    “The bank, Mr. van Buren, is trying to kill me. I will kill it.”
    ~President Andrew Jackson (survived assassination attempt when two guns misfired in his belly. Davey Crocket then beat down the would be assassin)

    #7090

    jal
    Participant

    @ TheTrivium4TW
    Re.:
    Napoleon Bonaparte
    Robert Hemphill
    Henry Ford
    and many more

    I have not verified the quotes. However, I have seen them, and others, on the blogs. ( I accept the fact that they knew “the score”.)

    What is there that is different this time?
    When these powerful men were passing on their wisdom to other educated men, their efforts proved to be sterile.
    The bankers won.

    Why should the fact that the web is making it possible for the average person to be aware of present and past stealing make any difference?

    #7091

    davefairtex
    Participant

    Trivium –

    Yes great video. Gives me a new appreciation for Mr. Grillo. Ilargi had good things to say about him a few weeks ago, but there’s nothing like a video that really brings the lesson home. If a picture = 1000 words, a video = a whole book.

    Especially one from 1998. I was completely asleep back then.

    #7106

    pipefit
    Participant

    DAve & The Tri-If you look around, you will always be able to justify just about any statement with a chart or three. The bottom line is that we are six years into this credit bust and CPI inflation is running at about 9%/yr if you used the same methodology as was used in the 1970’s, per John Williams of shadowstats. You can argue that they measured it incorrectly back then, but that isn’t the point. Our current rate of CPI inflation is approaching the rates of the 1970’s. It is called stagflation.

    Sentiment surveys don’t mean much to me. If 60% of those approaching mid-career say they have no faith in social security, yet aren’t saving much, they assume some combination of corporate pension, social secutiry, and other sources will finance their retirement.

    Unlike some of the dogmatic voices around, I have an open mind and therefore I realize this could go either way. It hasn’t been determined yet. As long as they keep up the pretense of representative democracy, a hyperinflation outcome is assured. They have the legal right to print whatever quantity of federal reserve notes as is required to meet any all obligations, and they will.

    Should there be some sort of military takeover, the odds tilt toward deflation. I don’t think it matters all that much. There are over 300 million people here, and enough productive assets to support about half that at the present standard of living. Presumably there will be some combination of population loss and standard of living reduction to reach a lower equilibrium. In fact this process is already well under way, with the big drop in gasoline usage, big drop in new home construction, etc.

    #7109

    davefairtex
    Participant

    @pipefit

    “If you look around, you will always be able to justify just about any statement with a chart or three.”

    If everyone involved in the discussion is being intellectually honest, that’s not true. There is fact, and then there’s lies. Given a particular chart, either the data is accurate, or not. If the data behind the chart is accurate, and the data is presented with every attempt to properly represent the truth in context, and the people are operating in good faith, then the discussion can be an honest one

    That is the kind of discussion we’re having, right?

    So I believe there is an important question to answer underlying your whole hyperinflation mindset. That is, why the heck have food prices gone nuts since about mid 2005?

    I happen to have a chart on this (naturally) and indeed it shows that food has gone up perhaps 230% since 2000, and perhaps more shockingly, about 60% over the two years of 2007-2008. While 60% isn’t hyperinflationary, its definitely disturbing. But then what happened after? If we eliminate the 2009-2010 period, food isn’t much more expensive now than in 2008. That 30% per year move hasn’t continued.

    How does John Williams explain this? Its all monetary? Hyperinflation? GAAP deficits? Fed money printing? None of it washes. Our GAAP deficit hasn’t changed since 2008 – if anything, its gone up. Money printing hadn’t happened in 2008 yet. So what then?

    My explanation: its oil – at least 80% anyway.

    Of course it could be speculation to some degree as well. But since the marginal barrel of oil is now about $60-$80 per barrel, and since there’s no decline in demand, the oil price has to rise accordingly. And where oil goes, food follows, since food production is energy intensive.

    So. Did food prices rise primarily because of GAAP deficits and Fed money printing? My gut says no. GAAP deficits do not seem to be causal. The chart would look quite different – there would be a continued steady upside pressure. My conclusion: its all about oil, with perhaps some leveraged speculation to throw in a bit of added oomph on both the upside and the downside.

    But these are my charts. Please feel free to bring out your 3 charts. I will assume you too are being intellectually honest, and are not trying to deliberately deceive me. And you can challenge my charts, tell me why I’m wrong, and we can work to get at the truth.

    That is why we’re here, right?

    #7110

    gurusid
    Participant

    Hi Dave,

    Ahh, food and ‘oil’:


    The thing that stunned me was the closeness of the correlation. For you math geeks, the correlation coefficient of the two data sets is 0.93!

    The next thing that’s fascinating is that changes in the Food Price Index appear to lead changes in the price of oil by a few months. Since food prices don’t drive oil prices as far as I know, this implies that they are both responding to the same underlying situation, but that food prices are a more sensitive indicator.

    The last thing that I noticed is the behaviour of food and oil prices in the last six months. The sharp rise in food prices is being noticed in the media now, but the graph hints that the story is just beginning.

    The key could be here: “Since food prices don’t drive oil prices as far as I know” actually with the rise of bio-fuels in the form of corn ethanol, there is an even greater link perhaps – oil price goes up, food price goes up so does the ‘bio’fuel price leading to higher fuel price (not ‘oil’ price) – but I’ll bet any correlation is down to speculators hedging their bets. It might be that oil inventories have longer lead times than food inventories and so betting on prices feeds through quicker – who knows? Definitely ‘some’ sort of correlation. :woohoo:

    Wait until there’s real scarcity, then we’ll see some ‘price shocks:
    Energy used to produce food:

    When the last tree has been cut down, the last fish caught, the last river poisoned, only then will we realize that one cannot eat money.

    …or oil! :sick:

    Though in the search for ‘truth’ I prefer perhaps the ‘original’ (?) version:

    Greenpeace helped to popularize this expression in the 1980s, but the earliest instance located by QI was in a collection of essays published in 1972 titled “Who is the Chairman of This Meeting?”

    A chapter called “Conversations with North American Indians” contained comments made by Alanis Obomsawin who was described as “an Abenaki from the Odanak reserve, seventy odd miles northeast of Montreal.” (The book uses the spelling Obomosawin.) Obomsawin employed a version of the saying while speaking with the chapter author Ted Poole. [AOTP]:

    Canada, the most affluent of countries, operates on a depletion economy which leaves destruction in its wake. Your people are driven by a terrible sense of deficiency. When the last tree is cut, the last fish is caught, and the last river is polluted; when to breathe the air is sickening, you will realize, too late, that wealth is not in bank accounts and that you can’t eat money.

    In later years Obomsawin became famous as an award-winning documentary filmmaker based in Canada.

    :whistle:

    L,
    Sid.

    #7114

    davefairtex
    Participant

    @gurusid

    I’ve been outcharted! My charts cannot yet do two y-axis settings, sadly, so I have to reduce myself to scaling things by hand.

    However! I happen to have data, specifically the five timeseries components that together make up the FPO Food Price Index: meat, dairy, cereal, oil, and sugar.

    So it turns out that neither meat nor sugar correlate well with oil. So I eliminated them from the chart. What remains of course are dairy, cereal, and oils.

    I totally see what you mean about some of these things leading rather than following oil. I didn’t see that before – your chart made that more visible. I think I need to go off and write some code!

    So that leading behavior I can’t explain. These days sometimes I see some commodities move almost in lock step intraday – I think some big hedge funds put on trades and/or have computers that encourage this sort of correlation but that’s just a guess on my part.

    I’m sure droughts cause things to become uncorrelated. [I looked at some charts offline]. Yeah, looking at wheat & corn, they definitely split directions in later 2012, and for whatever reason corn is much more weakly correlated with crude than wheat.

    It could be gambling by the big banks, hedge funds, and commodity index funds causing things to move largely in lock step. If people want a “commodity fund” they get all of them, which would cause them to move in unison to some degree.

    Bottom line, I don’t think the primary thing moving “stuff” prices around at retail is the GAAP deficit, or any sort of monetary policy decision-making at the Fed.

    But perhaps someone can show me a chart that shows otherwise.

    #7117

    alan2102
    Participant

    pipefit post=6785 wrote: Alan-IMHO, we are very close to entering the ‘hyper’ part of this inflationary trend. One indicator that I gave you already was that the 2012 fed. budget deficit, using GAAP accounting, was 40% of GDP.
    Another indicator is the oil:ng ratio….

    All good points. And maybe you are right that we are CLOSE TO ENTERING the hyper part. (I’ll bet that you are right.) But we are NOT THERE YET, was my point. So why call it what it isn’t?

    I am going by the dictionary definition of inflation — universally accepted, though rejected by TAE — of higher prices, and (hence) of hyperinflation as much higher prices, typically 10% rises per month, or more. By that definition, we are certainly not in a hyperinflationary state.

    #7118

    alan2102
    Participant

    pipefit post=6818 wrote: we are six years into this credit bust and CPI inflation is running at about 9%/yr if you used the same methodology as was used in the 1970’s…. Our current rate of CPI inflation is approaching the rates of the 1970’s. It is called stagflation.

    YES. Stagflation, which includes inflation. The inflationary mega-trend has not skipped a beat, for decades. Actually, it did skip one beat, in 2008, but it was brief, and it picked itself up and continued on as though nothing had happened. Remarkable, but true.

    Unlike some of the dogmatic voices around, I have an open mind and therefore I realize this could go either way.

    Ditto. The inflationary way is the most likely, but nothing is certain.

    It hasn’t been determined yet. As long as they keep up the pretense of representative democracy, a hyperinflation outcome is assured. They have the legal right to print whatever quantity of federal reserve notes as is required to meet any all obligations, and they will.
    Should there be some sort of military takeover, the odds tilt toward deflation.

    That IS the sad truth, is it not? Deflation. to some extent, is probably what SHOULD happen, but not at all necessarily what WILL happen. More likely to go the other way, since that will be far more politically expedient and palatable. Very very sad that it would take some sort of fascist putsch to do what actually needs to be done.

    I don’t think it matters all that much. There are over 300 million people here, and enough productive assets to support about half that at the present standard of living. Presumably there will be some combination of population loss and standard of living reduction to reach a lower equilibrium. In fact this process is already well under way, with the big drop in gasoline usage, big drop in new home construction, etc.

    On this I disagree. The present standard of living could easily be supported on a much lower resource footprint. The current system is so massively wasteful that wringing out even a substantial fraction of the waste would allow a reasonably comfortable transition. However, this would be (like deflation) politically near-impossible. The waste is “necessary” to keep the whole insane system going.

    #7119

    alan2102
    Participant

    davefairtex post=6821 wrote:
    I happen to have a chart on this (naturally) and indeed it shows that food has gone up perhaps 230% since 2000, and perhaps more shockingly, about 60% over the two years of 2007-2008. While 60% isn’t hyperinflationary, its definitely disturbing. But then what happened after? If we eliminate the 2009-2010 period, food isn’t much more expensive now than in 2008. That 30% per year move hasn’t continued.
    How does John Williams explain this? Its all monetary? Hyperinflation? GAAP deficits? Fed money printing? None of it washes. Our GAAP deficit hasn’t changed since 2008 – if anything, its gone up. Money printing hadn’t happened in 2008 yet. So what then?
    My explanation: its oil – at least 80% anyway.

    Good hypothesis.

    However, looking at the charts, I have a question. Would it not be true that food prices would tend to LAG oil prices by a year or two? That is, it would take that long for fuel to be reflected in food prices. Increased fuel utilization for a given year’s crop would not be fully priced-in for many months, perhaps a year or longer. This would be especially true of the more energy-intensive secondary feedstocks such as beef, where grain has to be grown first, then converted to meat on the hoof, then butchered, etc. — the whole process taking at least 1.5 years. Anyway, as I look at the charts, I see no lag, and in many places I see the opposite: food is leading rather than trailing. This observation is not consistent with the thesis. I’m not saying that higher energy prices do not impact food prices; of course they do. Just saying that that may not be as big a factor as was suggested.

    Further: higher energy prices are themselves part of the inflationary mega-trend, which is not exclusively about currency creation. Here again, I am going by the standard dictionary definition of inflation: increased prices. Higher energy prices will redound broadly, spurring inflation throughout the economy since everything depends more or less on energy, from raw materials to finished goods and everything in between. When you combine this with the Fed’s open-spigot policies (likely to be reflected in higher prices sooner or later) it is quite easy to see inflation from here to whenever (eternity? no, that’s too long 😉 ).

    #7120

    gurusid
    Participant

    Hi alan,

    alan: I am going by the dictionary definition of inflation — universally accepted, though rejected by TAE — of higher prices

    No they don’t ‘reject’ it:

    Alan’s dictionary ref:
    http://www.bing.com/Dictionary in·fla·tion [ in fláysh’n ] — higher prices: an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money. Synonyms: price rises, increase, price increases, rise.

    Stoneleigh: This source points out that changes in the money supply are the cause, and price changes are the effect. We do point out our definition regularly, and our readers understand that that definition underpins discussion here. We have also explained regularly why we use this definition.

    Also I suspect that your view is incommensurate with that of the TAE:

    Stoneleigh:The apparent paradox of deflation is that even as prices fall, things become less affordable for most (with the exception of those who have preserved capital as liquidity). We have been pointing out that things that people use would be getting less affordable. You seem to be suggesting that this will happen at higher nominal prices, while we are saying it will happen at lower nominal prices. The important point is the affordability.

    Further:

    Stoneleigh: We have had the inflation, only instead of a currency hyperinflation, we experienced a 30 year credit hyper-expansion. Either one amounts to an expansion of money plus credit compared to available goods and services, and is therefore inflation. Credit is equivalent to money on the way up, but not on the way down. Credit loses ‘moneyness’ and credit instruments are massively devalued in a great deleveraging. This is deflation by definition and it is already underway. Debt monetization is nothing in comparison with the scale of the excess claims to underlying real wealth that stand to be eliminated.

    Also:

    What we have said at TAE is that the money supply will contract substantially on the collapse of credit. Prices will follow to the downside, but as purchasing power will fall faster than price for most people, everything will become less affordable (ie prices will rise in real terms even as they fall in nominal terms). As a much larger percentage of a much smaller money supply starts chasing the essentials, they will receive relative price support and will therefore be much less affordable than everything else.
    And:
    You (alan) say that prices have risen for many years. Of course they have, as we have been in an inflationary credit hyper-expansion for 30 years, and prices generally follow changes in the money supply. Prices have, however, fallen where international wage arbitrage has been a major factor, such as for electronics, which illustrates other price drivers at work. (And where nominal prices fall despite inflation, real prices are going through the floor.) These confounding factors are one reason we use our clear and precise definition of inflation. To do otherwise takes all the explanatory and predictive value out of the concept, which suits the powers that be perfectly well by the way. They don’t really want people to understand the system.
    And:
    It is not TAE that has co-opted the term inflation. We are simply using the traditional definition, and the one it clearly make sense to use if one wants to actually understand what is going on. Many others use the same definition for the same reason. The alternative is confusion that leads to widespread ignorance as to the situation we are facing. It is that ignorance we are trying to combat. The definition underpinning discussions here will remain the same.

    Inflation is an increase in the supply of money relative to goods and services. Deflation is a decrease in supply of money relative to goods and services. ‘Stagflation’, is ‘Inflation’ (money supply increase) without any concomitant growth in GDP, and a relatively high unemployment rate. It resulted when banks increased the money supply to counter the recession bought on by the 1970s oil crisis. Most neo-classical economists cannot explain what happened because their theories do not work – read Steven Keen’s “Debunking Economics” to see why.
    As Stoneleigh says:

    Keeping terminology clear is important to presenting a consistent argument that all discussion participants can understand. Otherwise we end up talking past each other and appearing to disagree while we are actually describing the same dynamic.

    IMHO price ‘inflation’/‘deflation’ is a non-sense term used by the media to obfuscate and dumb down the reality of what is actually happening (and I have been guilty of thinking this way myself before I clearly understood what the concepts meant). It’s a version of Orwellian double speak, and more ominously of ‘double think’ “the act of simultaneously accepting two mutually contradictory beliefs as correct”:

    “To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy, to forget, whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed, and then promptly to forget it again, and above all, to apply the same process to the process itself – that was the ultimate subtlety; consciously to induce unconsciousness, and then, once again, to become unconscious of the act of hypnosis you had just performed. Even to understand the word ‘doublethink’ involved the use of doublethink.”
    “ The power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them… To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just as long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies – all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth.”

    ‘Prices’ go up and they go down, dependant upon what people will ‘pay’ or what the seller thinks they will pay. They do not inflate or deflate, they are results not causes.

    Don’t get me wrong, I am learning about all this stuff too, but it is important to hammer out the key concepts clearly and concisely. Other wise its double think and speak time… :dry:

    L,
    Sid.

    #7121

    alan2102
    Participant

    gurusid post=6832 wrote:
    Hi alan,

    alan: I am going by the dictionary definition of inflation — universally accepted, though rejected by TAE — of higher prices

    No they don’t ‘reject’ it:

    Alan’s dictionary ref:
    http://www.bing.com/Dictionary in·fla·tion [ in fláysh’n ] — higher prices: an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money. Synonyms: price rises, increase, price increases, rise.

    Right. Synonyms: PRICE RISES. PRICE INCREASES. Those phrases, in common parlance, are SYNONYMOUS with inflation.

    TAE does not accept this. TAE wishes to go with a definition which includes factors thought to be causal. TAE suggests that their definition is “traditional”. That may be true. I said in the thread where we discussed this: THEY MAY BE RIGHT. Their definition may be superior in every way. And YOU MAY BE RIGHT that the non-TAE definition is an evil Orwellian conspiracy to capture our brains and turn them into mush. And yet, TAE’s definition is TAE’s definition — it is not the commonly, universally accepted definition of today, found in all dictionaries and reference works. ALL dictionaries and reference works. They ALL define inflation as a general rise in prices of goods and services. EVERY ONE OF THEM. Google for it and see for yourself. Sometimes causal factors are alluded to, such as increases in currency supply or increases in demand for goods, but the bottom line, the sine qua non, ALWAYS, IN EVERY CASE, is price increases. That is now what the word means, in common parlance. Sorry about that. I did not make it so. It IS so.

    Further: Although I did not get into it much on that other thread, I actually find TAE’s causal analysis to be limited and inadequate. Inflation is said to be an increase in the supply of money relative to goods and services — but that is only one of several critical factors that can drive prices. Here they are, succinctly, compliments of about.com:

    https://economics.about.com/cs/money/a/inflation_terms.htm
    inflation is caused by a combination of four factors. Those
    factors are:
    The supply of money goes up.
    The supply of goods goes down.
    Demand for money goes down.
    Demand for goods goes up.

    You’ll note that TAE’s definition is limited to only the first one listed: money supply (or, credit), and perhaps the third (demand for money). What about the rest?

    In any given situation multiple factors are involved and it is not possible to say in advance what their relative weightings will be; i.e. it is not possible to build a SINGLE definition of “inflation” that includes a causal explanation that will be correct in every case.

    The phrases “demand-pull inflation” and “cost-push inflation” introduce causal theory, and do so with more granularity and nuance than does the TAE view. I suggest you read the about.com link.

    It is this nuance, this complexity and malleability (depending on circumstances that change), that makes it impossible to try to retain a single, narrow theory of causation in the word. No doubt causation has been dropped-off in contemporary usage for that reason. If one wants to discuss causation, they can to do so using modifying phrases like “cost-push” or some other.

    Anyway…

    I already talked myself hoarse on this subject so I will now shut up about it. Except to say that I will continue to use the word in the commonly-accepted contemporary way, and I will point out that I am doing so as I do so (just for clarity, in this context). For my purposes, inflation means higher prices, regardless of cause. Period.

    If you want to use the word in a different way, fine. Do it. Just indicate what you are doing as you are doing it.

    #7122

    davefairtex
    Participant

    alan –

    gurusid already beat you to it with that observation, and you’re both right, oil (at least in the case of 2007-2008) isn’t leading the charge. Oil & food are clearly correlated, but its not oil out in front.

    Can the move of both oil & food be traced to the GAAP deficit? The original thesis was that GAAP deficits were alleged to be massive money creation leading to hyperinflation – 7 trillion per year. I claimed that GAAP deficits do not cause price increases, because no actual money is created by such a deficit – and actual money creation chasing actual goods & services is required to create monetary inflation.

    Yet something drove huge price increases in the 2006-2008 timeframe. And those price increases which have been filtering through the economy over the past 3 years make people think Fed money printing is doing it, makes some people think about stagflation and hyperinflation and so on. But I don’t think thats the case. I think its something else.

    I wouldn’t mind figuring out what it is. Expectation of peak oil? Its all conjecture.

    #7123

    pipefit
    Participant

    Dave said, “On this I disagree. The present standard of living could easily be supported on a much lower resource footprint. The current system is so massively wasteful that wringing out even a substantial fraction of the waste would allow a reasonably comfortable transition. However, this would be (like deflation) politically near-impossible. The waste is “necessary” to keep the whole insane system going.”

    That is the irony. Strictly from an engineering standpoint, we could reduce our gasoline consumption by a huge percent, just by increasing the average number of people per rush hour car from the current 1.2 to 2.2 (or whatever the exact figure is). But using the free market (high gas prices) doesn’t seem to be working. Or even the somewhat socialist carpool lane strategy.

    Also, there is a huge number of stakeholders that are dependent of high gasoline consumption: state govt. hwy workers, highway contractors, gas stations, oil companies, etc. So there will some short term pain associated with the drop to a lower level of gasoline consumption.

    Getting back to Spain, I saw a worldbank url (https://data.worldbank.org/indicator/IS.ROD.SGAS.PC) that says petrol consumption in Spain dropped by 15% from 2008 to 2010. I’ll try to find a more up to date data series.

    Normally, with gasoline consumption dropping in developed nations, the price should be tanking, pun intended. But with consumption increasing in less developed nations, and the world at post cheap oil, the price is plateauing at a high level.

    #7124

    pipefit
    Participant

    @stoneleigh–When I look at natural gas, I usually look first at this url, https://ir.eia.gov/ngs/ngs.html, the weekly natural gas storage table/graph.

    The natural gas storage glut has been building for a decade, even with all sorts of drilling rig utilization reduction (in response to low prices). Winters have been mild, and if the global climate change mantra is even part right, will continue to be mild.

    We are in depression (some say deflationary, some say inflationary). In either event, it is crushing ng industrial demand, and crude oil demand, for that matter. However, crude is easy and cheap to trasport, so the pricing structure is global. Gas is local, or at least confined to the nearest contiguous pipeline system.

    Also, the housing slump hurts ng sales more than oil (and related products) sales. If houshold formation continues to be weak, this hurts ng sales growth more so than oil sales growth. e.g. an young adult living in their parents’ basement is using much less ng then when he was in an apartment, but he is burning just as much gasoline in his car he bought with the 1% auto loans they are handing out like candy.

    I don’t know why there hasn’t been more fuel switching from oil to ng. Seems like a no brainer, but it isn’t happening on near the scale.

    Keep watching the oil:ng ratio. It drops near 10:1 or below, I’ll be ditching my ‘hyperinflation outlook’ and join the TAE deflation club.

    #7125

    Nassim
    Participant

    Why not just say “price inflation” so that everyone is happy. 🙂

    #7126

    gurusid
    Participant

    Hi Folks,

    Forgive me but this is critical:

    Alan: Right. Synonyms: PRICE RISES. PRICE INCREASES. Those phrases, in common parlance, are SYNONYMOUS with inflation.

    And that is the problem, because most synonyms are context dependant and the context has changed so that this ‘synonym’ is no longer (if it ever was) valid.

    Nassim: Why not just say “price inflation” so that everyone is happy.

    Because it is incorrect.
    Why? Because it’s a category error . Price is a measure of value. It’s not the measurement that inflates but the thing being measured. In this case it is the relative value of the currency, which can be valued relatively to many things. When you ‘inflate’ a balloon, its not the ruler that gets bigger, but the balloon that gets bigger regarding the measure of the ruler. Price is a measure of many things, from expectation and to some extent demand, but also of affordability and notions of value. By conflating inflation and price, one distorts the very notions of value. Its not the ‘value’ that is increasing, but means to acquire that value that is inflating. That can happen if there is more of the means available, or if that means itself loses relative value so that you need more of it. Whether that means is money, goats or pink elephants, does not matter, it is the means that inflates or deflates, not the price which is a measure of relative value. At the moment the means (money, debt/credit) is disappearing. Wages unlike the previous inflationary eras are falling not rising, except for the very rich elite such as CEOs and bankers: the ‘FED’ and for that matter all the other ‘banks’ are not handing out free cash to people in the street. However, the prices of many ‘goods’ are being bet upon by the stock market system that is assigning arbitrary(1) prices and hence arbitrary value irrespective of what the true value is worth. As TAE have said, these stocks (and derivatives and financial products) have yet to be ‘marked to market’ to discover their true ‘price’ or value. What the ‘measure’ of their true worth is. Thus currently we have a situation in which price has become divorced from the money supply; it’s a bit like an authoritarian government ‘fixing’ the state price of bread, regardless of what is affordable or what the bread is actually worth, only here its called the ‘free’ market, and instead of party officials fixing the price, we have stock brokers and computerised algorithms. These are price rises driven by speculation on value (virtual digital value at that) NOT inflation of the money supply. The irony here as regards ‘energy’ prices such as oil is that they would go through the roof, as their value has been held down as regards their true worth, say when compared to the equivalent in human labour energy. As regards ‘price inflation’ – good luck with trying to measure anything with an inflatable ruler… 🙁

    The boys and girls in the Bubble? Damn right:

    “”Reality” is what we take to be true. What we take to be true is what we believe. What we believe is based upon our perceptions. What we perceive depends upon what we look for. What we look for depends upon what we think. What we think depends upon what we perceive. What we perceive determines what we believe. What we believe determines what we take to be true. What we take to be true is our reality.”

    (2)

    L,
    Sid.
    1 A category mistake, or category error, is a semantic or ontological error in which “things of one kind are presented as if they belonged to another”,* or, alternatively, a property is ascribed to a thing that could not possibly have that property. (*Simon Blackburn 1994. The Oxford Dictionary of Philosophy, Oxford University Press, p. 58.)

    2 This is attributed by many to a David Bohm lecture at Berkely, 1977, however in Gary Zukav’s “The Dancing Wu Li Masters”, (1980, p.310) he writes this phrase without reference to Bohm with the opening word “Reality” in inverted commas, and this gives me reason to think he is the originator – perhaps inspired by Bohm..

    #7127

    alan2102
    Participant

    gurusid post=6838 wrote: By conflating inflation and price, one distorts the very notions of value.

    Who is conflating anything? I am simply referring to higher prices as “inflation”, same as every other dictionary and reference work in the world. You can still have whatever causal theory about those higher prices that you please; I’m not taking that away from you. You just cannot call your causal theory “inflation” and still communicate effectively with the rest of the world, without cumbersome preliminary explanations.

    Its not the ‘value’ that is increasing, but means to acquire that value that is inflating.

    True. Who said otherwise?

    It is a truism in investing, and in economic life, that price is not value, and pricing is not valuation. Everyone either knows this, or should know it.

    But the point is (from my earlier post) that higher prices have several possible causes, and increased money supply is just one.

    Trying to build a theory of cause into the word “inflation” is a non-starter; see discussion at comment #6833.

    currently we have a situation in which price has become divorced from the money supply; it’s a bit like an authoritarian government ‘fixing’ the state price of bread, regardless of what is affordable or what the bread is actually worth, only here its called the ‘free’ market, and instead of party officials fixing the price, we have stock brokers and computerised algorithms. These are price rises driven by speculation on value (virtual digital value at that) NOT inflation of the money supply. The irony here as regards ‘energy’ prices such oil is that they would go through the roof as their value has been held down as regards their true worth, say when compared to the equivalent in human labour energy.

    So, prices are being driven UP artificially, but are also being held DOWN artificially. Maybe you could explain in more detail.

    #7129

    gurusid
    Participant

    Hi Alan,

    So, prices are being driven UP artificially, but are also being held DOWN artificially. Maybe you could explain in more detail.

    I just did. Its down to a distorted value system which assigns an arbitrary monetary value to everything, even when a ‘price’ cannot be put on it to start with. How can you put a monetary value fresh clean water to drink? How can you put a monetary value fresh clean air to breath? How can you put a monetary value on good soil and fertile seeds that provide food? How can you put a monetary value on an energy source that gives you the equivalent of one to seven years of constant human toil (twelve if you give them a break now and again)?

    It is the ‘wetiko psychosis:

    Now, were Columbus and his fellow European exploiters simply “greedy” men whose “ethics” were such as to allow for mass slaughter and genocide? I shall argue that Columbus was a wétiko, that he was mentally ill or insane, the carrier of a terribly contagious psychological disease, the wétiko psychosis. The Native people he described were, on the other hand, sane people with a healthy state of mind. Sanity or healthy normality among humans and other living creatures involves a respect for other forms of life and other individuals, as I have described earlier. I believe that is the way people have lived (and should live).

    The wétiko psychosis, and the problems it creates, have inspired many resistance movements and efforts at reform or revolution. Unfortunately, most of these efforts have failed because they have never diagnosed the wétiko as an insane person whose disease is extremely contagious.

    Jack D. Forbes (Derrick Jenson quoting Jack D Forbes on the ‘insanity’ of it all)

    If your value system is corrupted or worse your value system is not based in reality at all, then it is quite easy to assign arbitrary* notions of value to anything, including court judgements on the very sanctity of life.

    Dictionary ref: arbitrary. adj. 1 based on or derived from uniformed opinion or random choice; capricious. 2 despotic. (Concise Oxford, 9th Ed. 1995)

    On conflating the measure with the thing being measured, well it kind of goes to eleven…

    https://www.youtube.com/watch?v=EbVKWCpNFhY

    😆

    L,
    Sid.

    #7130

    alan2102
    Participant

    TheTrivium4TW post=6800 wrote:
    Your thesis is that “Money” will hyperinflate their trillions in wealth away because it is “easy” and “Money” wants to please government workers with paychecks.
    I have news for you, “Money” has no motherland and no affinity towards government workers. Their sole object is gain for themselves AND HYPERINFLATING THEIR WEALTH AWAY IS CONTRARY TO THEIR PSYCHOLOGICAL MAKEUP.

    This argument comes up in different forms from time to time in discussions of inflation vs. deflation. The argument is: they (TPTB, the Money Power) will not let inflation happen because it would let the debtors off the hook; it would inflate-away THEIR wealth. Not a bad point, superficially — depending on who “they” really are, and in what form their wealth is stored (dollars?). But it goes without saying that they have clear plans to preserve their wealth, no matter what. And they will probably be successful.

    I recently read an interesting point about this. Here it is:

    https://www.tfmetalsreport.com/comment/264618#comment-264618
    Questions about nickels…
    Submitted by Katie Rose on January 28, 2013 – 12:30pm.
    […snip…]
    A brilliant friend of mine is convinced that we are headed for
    hyper-inflation. He has spent many months studying what
    happens in countries when the currency rapidly deflates while
    real goods and services rapidly inflate.
    He told me the first things that disappear are the coins.
    People begin to hoard them, thinking the metal/s they are made
    of has/have some value. In the case of the USA, the only coin
    that has any intrinsic value due to metal content is the lowly
    nickel.
    Next, he claims, TPTB get the legislature to pass emergency
    legislation concerning bank loans and interest rates. He told
    me most people think that they will be able to pay off their
    home loans with debased money. Not so!
    He told me that within 48 hours of hyper-inflation beginning,
    legislation is passed tying/increasing loan payments of any
    kind to the rapidly decreasing monetary value. If the dollar’s
    value goes down 2% in a day, the house payment increases by
    2%. He told me that folks have a 24-48 hour window to pay off
    their loans, then the legislation is passed and they are truly
    screwed. He told me this has always happened. It’s as if the
    legislation is already written, just waiting in the wings for
    the event to begin. Then the legislature moves with lightning
    speed to accommodate their Masters.

    Interesting idea! Makes perfect sense. The moment I read it, I had one of those forehead-slapping “OF COURSE!” moments, like “yes, of course that is true… how could it be otherwise?”. The ravages of hyperinflation will be for the little people, not the elites, who will have multiple layers of protection. Their puppet politicians will immediately pass legislation (probably already written and ready to rubber-stamp) indexing interest on loans to the prevailing rate of inflation — “fixed rates” be damned. Hey, this is a National Emergency! We’re under attack by Financial Terrorists! You’re either With Us or you’re Against Us!

    “Dateline 13 January 2014…. the U.S. senate, in emergency weekend sessions, passes the Financial Terrorism National Defense Act (FTNDA), calling for immediate…….”

    Can you seriously imagine it being otherwise?

    That is EXACTLY what will happen.

    …………………………

    PS: I left in the paragraph about nickels just because it remains an interesting quasi-investment or wealth-preservation opportunity. U.S. nickels, composed of 75% copper and 25% nickel, are currently worth more than a nickel, and can be bought at any bank in unlimited quantities; 50-roll boxes cost $100. Several proposals to debase the nickel have come and gone over the last few years; one of these years they WILL do it — i.e. replace most of the copper and nickel with (worthless) zinc. It already costs the mint nearly a dime to make each nickel, all costs included. So the clock is ticking on this idea. When hyperinflation kicks in, nickels will preserve and gain purchasing power. The gains could be great. The classic story about this is a guy, at the peak of the Weimar hyperinflation, who bought an entire city block in downtown Berlin for 10 ounces of gold. I’m not sure how true that story is, but it might as well be. It illustrates the general phenomenon of dramatically increased purchasing power of tangible commodities in a hyperinflation. Anyway, I’ll bet that nickels eventually have the purchasing power of a 2013 buck. Those boxes that you tucked away back in 2013 could come in mighty handy. 🙂

    #7131

    pipefit
    Participant

    Alan said, “When hyperinflation kicks in, nickels will preserve and gain purchasing power.”

    What is even more incredible is that a nickel also protects the holder against deflation!!! It cannot, by legal tender law, go below five cents worth of purchasing power, even if the contained metal were to go near zero in price. e.g. a deflationary depression unfolds, and the price of copper and nickel go to 1/20 of their present value. Your roll of nickels can now buy enough metal build a car, lol!!!

    #7133

    davefairtex
    Participant

    alan, pipefit –

    Nicely done guys. Since a nickel is always worth 5 cents, the government by law has put a floor on its value. And if hyperinflation hits, the metal in a nickel will appreciate in value! That’s a trade that only has upside to it!

    However, there is an aspect of practicality here. In the physical PM community, silver is considered to be a bit too weighty to be a convenient wealth savings vehicle. Nickel is 100 times worse!
    1 pound of silver: $421
    1 pound of nickels: $4.53
    1 ton of silver: $842,459
    1 ton of nickels: $9,060

    Can you imagine saving $9000 in nickels? At 5 grams each, you get 90 nickels per pound, and 181,200 nickels per ton.

    An $18,000 car could be bought with two tons of nickels! 331 pounds to pay your $1500 rent!

    But if you ignore the logistics and storage aspect, its a no-lose trade. And there aren’t many of those around.

    https://www.coinflation.com/

    Coinflation says the nickel is worth about 101% of face value right now. The real deal is pre 1982 pennies, which are 232% of face.

    #7137

    gurusid
    Participant

    Hi Dave,

    Your reply summed up nicely the whole conundrum. Practically speaking, i.e. in the real world it doesn’t work; but in the fantasy worlds inside the deluded minds of many people on the planet today, and especially the ‘financial world’ it does.

    if you ignore the logistics and storage aspect, its a no-lose trade

    When humanities little bubble bursts and they find themselves in the Real world – what’s left of it – they will find out how much they truly have ‘lost’. That time is fast approaching… :ohmy:

    L,
    Sid.

    #7221

    alan2102
    Participant

    davefairtex post=6845 wrote:
    Can you imagine saving $9000 in nickels? At 5 grams each, you get 90 nickels per pound, and 181,200 nickels per ton.

    Yes, I can easily imagine that. It is not as big a deal as you think.

    Actually, nickels are much more compact for wealth storage than most other things — wheat, butter, whiskey, ammunition, etc. (Though ammo might come close these days.) If you have any money, you have to put it somewhere, and paper cash is obviously a terrible bet, as is anything in the electronic system. But where? Bolts of linen? Condoms? Canisters of propane? More compact is generally better.

    You understand, surely, that we are talking about hedge against a very different kind of world — a post-dollar world, or a devalued-dollar world, or an extended-bank-holiday world, etc., etc. The appropriate comparison is not nickels vs. visa cards or hundred dollar bills, but nickels vs. other hard goods, or nickels vs. dollars of newly decimated purchasing power.

    Plus, of course, the rock-solid protection underneath (as someone pointed out up thread) of nickels never being worth less than 5 cents. In other words, you are protected no matter WHAT happens!

    Some very smart people have picked up on this idea. Millionaire investor and fund manager Kyle Bass bought 20 million nickels — $1 million worth:
    https://www.cnbc.com/id/44788851
    Kyle Bass’s Nickel Collection

    Smart man! He knows what is coming. He also has large gold bars in his desk drawers, it is said.

    Nickels remain a steal at only 5 cents each, or $100 per box at the bank — about 3″ x 4″ x 10″. $1000 almost fits into a cubic foot of storage space. Not that big of a deal, unless you are living in a studio apartment. Much better than most other hard goods.

    #7222

    alan2102
    Participant

    davefairtex post=6845 wrote:
    Coinflation says the nickel is worth about 101% of face value right now.

    Yes, and that will change. It has been near 200% in recent years, and it will re-visit that level and much higher in coming years. Nickels will sooner or later be worth a quarter, eventually perhaps even a buck, in 2013 terms. Nickels remain a steal at only 5 cents each. The mint is letting them go at far below cost.

    The real deal is pre 1982 pennies, which are 232% of face.

    True, they are a good deal too. Only problem is somewhat more bulk. But not too bad, if you have a good source. And now you DO have a good source:

    https://portlandmint.com
    https://portlandmint.com/shop/product.php?productid=2&cat=2&page=1
    68lbs of Copper Pennies
    $100 face value
    $170.00 + $16 shipping

    ……….. ha! Free money! They’re selling pennies for LESS than melt value! Better deal even than nickels, for the time being, though as I say there is somewhat more bulk.

    I still like nickels because of the compactness, and the neat “factory” boxes in which they come from the bank. The 50-roll boxes are a convenient unit for storage, measure and (eventually) exchange.

    #7230

    alan2102
    Participant

    davefairtex post=6845 wrote: In the physical PM community, silver is considered to be a bit too weighty to be a convenient wealth savings vehicle.

    Is that so? I had not noticed.

    But here is my question for you, Dave: where should people put their money? What practical suggestion do yo have? I trust that it is nothing in the electronic system. I also trust that it is nothing in paper form. Given the current obvious systemic risks, such vehicles are highly problematic. But, regardless, what do you suggest?

    This is a serious question. Most people have at least some savings, however modest. What should they do with them?

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