Everything’s Deflating And Nobody Seems To Notice


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    LIFE Freedom in peril 1941 Whenever we at the Automatic Earth explain, as we must have done at least a hundred times in our existence, that, and why,
    [See the full post at: Everything’s Deflating And Nobody Seems To Notice]


    It staggers me that you have to keep explaining this. If inflation/deflation are actual things, then prices cannot be part of the definition. Prices change for any number of reasons, a new, vastly more efficient buggy-whip production method drives down prices a productivity per wage $ increases, a new buggy whip mine opens, and prices fall again, causing most of the others to close so prices rise, then along comes the gas powered car and people stop buying buggies and whip prices tumble again; none of that has anything to do with monetary shenanigans yet all of them cause price changes, what the hell is so difficult?

    If all that business is done on capital derived from savings, the economic and financial effects will be different from doing it on debt. At some point debt gets so big that the price of money either falls or the ability toi pay the interest vanishes. So money-creators reduce the price of debt till if falls below zero. Now those who have saved are getting caned for their prudence and remove money from the system, either by using it to pay off their own debt or by converting it into land, gold, paintings, whatever they think will hold “value”, however they define it, or they take it out in cash and stick it under their pillows. But once they have paid off their debt and/or stuffed their mattress with it they have effectively extinguished money, deflating the financial system. defaulting on debt does the same thing. Good grief its not rocket science.


    7 years of bureaucratic obfuscation later;

    Subjective definitions of financial terms aside, there are really only two ultimate choices here for the creators of the debt based currency to extinguish unsustainable debt. Default or devalue.

    All else is just noise,,, Bread and Circuses, as it were. The Fed is a political animal and will follow the path of least political resistance in the end.


    A deflationist here might be selling farmland, tools, precious metals, houses,,,most anything “real,” in order to buy them all back at half price in future. He also might be tempted to hoard Federal Reserve IOU dollar debt instruments.

    The Half-Life of the Dollar

    OTOH, looking at history, it isn’t likely the Dow goes back to 1000 as in the late 70’s, or a home to $5000 as in the early 60’s, or a new Chevy to $2400 as in 1973. Nickel beer? 25 cent burger?

    Default or devalue. Place your bets.


    To clarify, Default extinguishes TPTB. Devaluation preserves TPTB a bit longer, so they may live to fight another day, or buy time to strip the copper wiring from the house of cards before it falls.

    Why, again, are they called TPTB?

    Of course, in the real end, the Fed, along with it’s currency will be gone. At that point, we are all where we are, then.


    “A deflationist here might be selling farmland, tools, precious metals, houses,,,most anything “real,” in order to buy them all back at half price in future. He also might be tempted to hoard Federal Reserve IOU dollar debt instruments.”

    A deflationist would not be looking at selling and then buying back stuff for cheaper unless (s)he has a lot of debt on it. Farmland owned outright is the greatest treasure provided it’s productive. Tools are..tools. Once you got them, why sell? Gold is good, but only if (s)he can hold it for 10-20 years. ‘Hoarding’ Treasuries works short term.


    “…we’re right to insist on inflation being defined in terms of the interaction of money-plus-credit supply with money velocity (aka spending).”

    Here a portion of one sentence describes the interaction of 3 factors –a rare feat. It’s hard to wrap one’s mind around 3 factors inter-relating, as a definition. Wonderful how these few words clarify the dynamic. We’re taught to think reductively. So it’s easy for TPTB to hide what’s really going on, perhaps even from themselves.

    What I don’t understand is why we can’t just “reset” the economy. After all, it’s a construct serving TPTB. A debt jubilee, anyone? I’m for default. Sure it would be disruptive, and some who richly deserve a haircut will get one. And the whole economy will shrink, as it’s doing anyway. Yes, that would mean de-population, which will happen anyway. People are willing to die for a cause they care about. As one example, end-of-life hospice is becoming popular because people would rather die sooner and keep their dignity. People can be policed (mentally & physically) only in so far as they are willing to be policed. In other words we have the power. Let’s keep the social inheritance, our institutions that serve us well, and jettison the rest in a new spirit of valuing the commons.


    Trying to explain this to people who don’t share our focus is like talking to the wall. We must remember than the owners are masters of word games, constantly using them and creating them in ways that promote thought confusion. Just another tool in the control armamentarium. Hoarding laddered short-term Treasuries plus personal cash is optimum at this point. Loss of after-tax principal in a severe deflation should be strenuously avoided. Just as central banks tend to aggressively buy gold when they should be selling, they also sell Treasuries when they should be holding. There is going to be much demand for short-term Treasuries, which may exceed supply. That is why the 2 year FRN Treasuries, which adjust periodically to reflect current market rates, should also be laddered and part of your Treasury portfolio. World debt that has been built up to such staggering proportions is the antithesis of good, self-liquidating, prudent debt. Monstrous debt defaults await us.


    daisychain asks “What I don’t understand is why we can’t just ‘reset’ the economy.” Indeed we can, and indeed we will. What is a dollar? Nothing but an idea in your head, backed up by a few electrons. We can reset the entire world financial system, and we will. But the trigger will likely be involuntary. A reset is a short term catastrophe to people up to their eyeballs in debt because they will lose their jobs and risk losing just about everything they have. A reset is both a short term and long term catastrophe for the 1% because they are heavily invested in the system and the owners of all that debt, as well as asset prices that are inflated because of the existence of all that debt. The 1% will try to scare the hell out of the debt slaves and trick them into saving the system.

    The only people who want to reset the system are those who are less dependent on it: people out of debt, people who have pulled their savings out of the system. This is actually a very tiny minority and will certainly remain so until calamity strikes.


    Doesn’t a jubilee mean those in debt would be relieved of it? Yes, those holding debt would lose –the ones well-resourced already. If it were a mass planned event, people would have time to dis the banks, which wouldn’t be reliable in such a scenario. Not rocket science to build new ones.

    Debt is a sacred cow. The back of my hand to that foot on our necks. Varoufakis in Europe has emboldened me to think we can take the reins of the chariot we’ve built together and make something good and useful of it. Rather than waiting with gritted teeth for calamity. Demolition is an expensive chunk of a construction project. Gravity helps, but it’s a deliberate process.


    IMO much of the problem with the deflation definition issue is that the velocity argument (which I understand) is eventually, with a lag, going to usually translate into some sort of real world, recognizable event for the everyman who thinks of just “prices” for things like his house.

    Great example, Nicole herself said it best in this quote which really resonated with Cory:

    “One of the attractive features about selling now is that you lock in today’s property price in cash – cash that will then go ten times as far as you ever imagined it would in a few years (provided you don’t manage to lose it in a bank run). You would then be able to afford a great property – perhaps large enough for yourself and your extended family – and still have money left over for taxes and necessities.” Nicole Foss, Jan 2009


    It is only when you have a lot more of these “rubber hits the road” real world realization events when people will quit debating the TAE definition. If anyone is still alive by then, they will likely all see the things the way TAE does.



    I don’t really understand the significance of the apparent global USD “recession”. Is it significant? In what way?


    Well, the linked article wasn’t sure how significant USD recession is and noone here seems to know so I guess it’s just an interesting observation.

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