October 20, 2012 at 10:29 pm #8425
It's time we do away with the notion behind the incessant flow of stories and warnings about upcoming hyperinflation in the US. It can't and t
[See the full post at: US Hyperinflation Is A Myth]October 21, 2012 at 4:47 am #6054p01Participant
“And I have often said that the deleveraging will be so severe that what may come after is only moderately interesting, since you won’t hardly recognize your world once deflation has run its course.”
I’d expand that to: you will hardly recognize yourself once deflation has started in its earnest, let alone run its course.October 21, 2012 at 5:48 am #6055
Feeling tense? There there, let out those tears. Feeling better? Good, Let me offer a you an oily rub along with a nip and tuck.
This recovery will be long and slow. I know you’re still sore, but rest assured that you’re getting better.
It’s really up to the media.
You don’t change the subject during August vacations (see 2008).
And you don’t change the subject during the run-up to a re-election.
The power of mass media to guide public behavior has been stunning.
Sumner R. works the lights, Rupert M. plays the music, and Barry D. paints your toenails. Now then, who’s ready for a bit of blackjack?October 21, 2012 at 5:58 am #6056DIYerParticipant
ZH now has a nostalgic article “How I Caused the 1987 Crash” by Bruce Krasting. Back in 1987 I was not really paying much attention, and it did not have an immediate effect on my life.
What might serve as a bottom for the current crash? One would think that there would be some level … I’m trying to picture a broken money system and unable to bring it into focus.October 21, 2012 at 7:31 am #6057John DayParticipant
This is fine work on your part, yet again…October 21, 2012 at 4:05 pm #6058
Puru Saxena and Tyler Durden? My preference is for John Williams, his numbers say hyperinflation is inevitable, and he is correct IMHO.
Clouding the issue of unabashed fiat creation with economic mumbo jumbo only serves to muddy the waters.
The path chosen by the Fed and its cohorts in Europe is inflation and currency debasement on a grand scale, standing in their way used to be called “Fighting City Hall” back in the good old days when being wealthy meant having the mortgage on your Ten thousand dollar home paid off.October 21, 2012 at 4:44 pm #6059bluebirdParticipant
The people near me don’t care about the massive debt bubble. That is because they can still buy whatever they want with a credit card or cash. They don’t think it necessary to prepare for anything or read informative articles. Only when this massive bubble bursts, and people will not be able to get what they want, then maybe they will figure it out.October 21, 2012 at 8:43 pm #6060
“Clouding the issue of unabashed fiat creation with economic mumbo jumbo only serves to muddy the waters. “
Labeling this article and the quotes in it ‘mumbo jumbo’ is not conducive to a good discussion. If you have to resort to that, you’ve already lost most of the argument right there.
The velocity of money, which is at its lowest point since 1959 at the very least, is a decisive indicator. As is the – closely connected – huge gap between the monetary base and the money supply.
How one would arrive at (hyper-)inflation in view of these indicators is, to put it mildly, not obvious.October 21, 2012 at 9:03 pm #6061
I understand the deflation and inflation, as you have so often explained.
The deleveraging, a.k.a. ]bdebt deflation, has hardly begun,[/b] and it for now remains largely hidden behind a veil of QEs. That doesn’t negate the fact that ultimately QE is powerless to stop it, even as it sure manages to fool a lot of people into thinking it can.
What I see, going forward, is a continuation of the momentous battle between the 01.0%. Those who have cash and access to the printing press against those who are forced to sell or must take a haircut and/or relinquish their claim on an asset.
the IMF saying European banks will need to sell $4.5 trillion in assets through 2013.
Those entities that could not pay their interest on their loans or pay out a dividend are the dominoes that caused the crash when they were asked to return the capital to the lenders. ( Letting the market decide the winners and the losers. ie. Lehman bros.)
Letting the market decide the winners and the losers would end the financial system.
The ponzi financial system is now kept growing and stabilized by having the gov.printing press substituting and replacing the cash flow that would normally be generated by the printing press of the banks. (lending money that they don’t have so that they could get a cash flow from assets.)
Having an asset, such as a house that has been abandoned, rotting and not generating a cash flow is perfect for a bank that is receiving a substitute cash flow from the gov. printing press. This keeps everyone who happens to be relying of that cash flow continuing with their life style as if nothing has changed. Checks for pensions, dividends, U.I., S.S., keep right on coming just like they have been for the last 30 years.
The problem has now moved to include the governments. If a government cannot print money to continue replacing the cash flow of the banks then their only options is to reduce the cash flow to their own population, austerity, (Services and Checks for pensions, dividends, U.I., S.S. and health care).
That is the one thing Ben and Mario have power over: they can give money away that you will have to pay for down the line. They can lend it out to banks knowing that it will never be repaid, and not care one inch. Knowing meanwhile that you won’t either, because you don’t look at what’s down the line, you look at today, and today everything looks fine. Except for that graph, perhaps, but hey, how many people are there who understand what it says?
Saving the big banks means saving the financial system which means saving the ability of government to continue giving Services and Checks for pensions, dividends, U.I., S.S. and health care.
At The Automatic Earth, Nicole – Stoneleigh – Foss and I have been saying for years that deleveraging and debt deflation are an inevitable consequence of what went before and an equally inevitable precursor of anything that may come after. And I have often said that the deleveraging will be so severe that what may come after is only moderately interesting, since you won’t hardly recognize your world once deflation has run its course.
As long as governments can keep printing to keep the cash flow going, deleveraging will continue at a slow pace.
Players, in the 1.0%, in the game can make the system destroy itself by buying gold and waiting for a profit due to hyperinflation.
There will have to be many more Greece before hyperinflation hits the USA.
Meanwhile, I’ll cut my own hair and only get a haircut for special occasions.
🙂October 21, 2012 at 10:47 pm #6062p01Participant
I haven’t laughed so hard in a while. It got really confusing towards the end, with Greece and hyperinflation in the US, but it was epic. Good one! I wish I has some karma to give you.
Stabilizing Ponzi…my jaws hurt. 😆October 22, 2012 at 1:15 am #6063
Laughter is better than gold.
Did I earn an haircut?
🙂October 22, 2012 at 2:28 am #6066AnonymousGuest
I enjoy this article and all your others, well thought out. However, what I fail to understand if all this end game has been planned, either if it ends up as a deflationary spiral or not, which country benefits the most or will use this to their own self-interest. It seems to me that to increase the velocity of money and releasing large amount of credit to the private sector, something political must happen first. No one seems to be addressing this as on the books there are new technolgies ready to come to the market ( ie. the latest is a cardboard bike for $20). Is this the end game and the only window of opportunity for the US to control China before China becomes self-sufficient with a large middle-class?October 22, 2012 at 4:28 am #6067DIYerParticipant
I have it on good authority (My Republican co-workers and Sean Hannity) that this is all the fault of the Community Reinvestment Act.
If the Democrats just hadn’t twisted the arms of the bankers to make all those sketchy loans, we’d all be rich by now.
And probably have pockets full of gold coins.October 22, 2012 at 4:42 am #6068NassimParticipant
If the IMF is saying that European banks will need to sell $4.5 trillion in assets through 2013, I don’t really need to know any more. I mean, that is around $10,000 per person in Europe.
Where is the money coming from Golden Oxen? Selling gold? Or is this also “economic mumbo jumbo” 🙂October 22, 2012 at 5:33 am #6069
The terror of the crowd.
The first 30 seconds is all you need.
The charisma has not yet arrived. But the train has left the station.
October 22, 2012 at 9:19 am #6070davefairtexParticipant
Golden Oxen –
I have to say I liked many of those charts Ilargi posted, and the linkage with Japan makes sense to me since the situation is post Gold Standard and thus directly relevant. QE has an effect certainly, its just not the one many people imagine it is. Slowing money velocity – interesting stuff, worth watching. One cause of hyperinflation is rapidly increasing money velocity, and we’re seeing the opposite here.
Likewise, its totally clear to me that homeowners and small business are reducing their overall debt, for the first time – well ever, at least according to my Fed data. Reducing debt, in our money system, is deflationary whether accomplished via default or by paying it down. And they’ve been doing this since Q2 2008. And if you even bothered to glance at the data series, you’d see just how unprecedented this is.
The recent housing price bounce is (most likely) due to the massive reduction in interest rates; most homebuyers with mortgages buy with an eye only on monthly payments. As interest rates drop, payments decline, and they can get more home for the same payment. Mark Hanson calculated that over the past 12 months purchasing power went up by about 15%. All else being equal, that should have raised prices by that same amount. It didn’t. But the really amusing bit is, overall mortgage balances dropped over that same period. Deleveraging continued – a quite solid indicator for the deflationary trend! Rates at 3.5% didn’t bring buyers out of the woodwork. Do we imagine rates at 2.5% will magically do this?
Simply asserting Ilargi’s evidence is “mumbo jumbo” says to me that either you don’t understand the case being made, or that you don’t have a valid counter-argument.
Since you believe so strongly in Williams, why not find and post some compelling case (the stuff you call mumbo jumbo) that he has produced to explain the hyperinflation that is just waiting to burst forth – specifically how gobs of new money will be created without an influx of willing borrowers. Which do not seem to exist, and haven’t since 2008. Or why money velocity will suddenly increase. Which it hasn’t.
Certainly, trends can change, but we need to first have a clear understanding of the trend currently in place, and evidence (data series) that help to show us where we are and what the direction has been are quite valuable to furthering that understanding.
We can keep an eye on velocity and if that situation changes, then we might have to revisit. I really like having numbers that we can watch to see the evolution of thesis.
Sometimes I think that people with “faith” in an outcome feel no need to actually prove their case (or show their work). “Whatever it is you’re saying, why, it has to be wrong, because its import runs counter to my article of faith.” That might work among co-religionists or members of the choir, but it doesn’t play so well among people who prefer cases to be proven based on facts and evidence.October 22, 2012 at 11:48 am #6071AnonymousGuest
First time poster here but really enjoy the articles Ilgari.
I’m a deflationist at heart but have come to believe this unnatural inflation will be the rule by hook or by crook.
My two cents on housing (my wife in a top agent in our market and we know many realtors in other Western markets). Seems the big change in housing hasn’t neccessarily been lower rates (though that can’t hurt) but the Fed’s actions of last April to allow banks/Fan/Fred (etc.) to hold REO and rent it for 5yrs and up to 10yrs if needed. Seems this move coincides with the slowdown of distressed sales and subsequent low to now ultra low inventories. Buyers are getting “buyers fever” again…not quite like ’06 but still multi bids over asking.
I’m antithetical to this ongoing market manipulation…but I don’t know of any impending reason for the distressed-less inventory to continue…and thus a continued squeeze up in prices. Call it baby bubble or echo-bubble but I fear the Fed may have won this housing round (for how long I don’t know) but if housing (at the margin) can be turned, our stagflation could be turned to inflation nearly everywhere but wages (the mothers milk of true growth).
I actually believe if the Fed has turned housing that this RE bubble will stand alongside bubbles in equities, bonds…this bubble coupled with nations inability to slow deficits or face the music is the underpinnings of hyperinflationary tendencies. Not saying it will happen but that the environment of deleveraging (austerity, paying down debt, etc.) is being “debunked” by Spain, Greece, etc. on international level and by Fed on national level (QE infinity is an infinite put on leverage).
Glad to know why I’m wrong…serious.October 22, 2012 at 12:18 pm #6072davefairtexParticipant
Not being in the RE industry I must rely on what others say. Most of my data comes from Mark Hanson.
The foreclosure pipeline requires some large number of months to completely execute; varies by state but its anywhere from 6 months to years. There was a foreclosure moratorium put in place last year (due to the wholesale fraud in foreclosure documentation finally being acknowledged), and I’m guessing that’s a big chunk of what is causing the dry-up in distressed property today.
I’d guess allowing the banks to keep REO around and rent it out contributes to this as well. Of course it also allows the banks to avoid recognizing losses too, which is always helpful if you are particularly focused on bank welfare.
For me, real estate will be “turned around” once interest rates return back to a more normal 6.5%, when the US government stops borrowing 10% of GDP every year, when the Fed stops monetizing the debt, and when Fannie & Freddie are no longer 90% of the mortgage market. Prior to this happening, what we’re seeing is just the result of stimulus and not sustainable.
I think that in some areas where rents exceed payments by a good margin, RE might be a decent buy. But – I’m cautious. What happens when rates go back to 6.5%? A 30% drop in home prices? How much fun would that be if you’ve put 20% down?
Do we imagine the Fed will be able to keep rates at 3.5% in perpetuity?October 22, 2012 at 5:08 pm #6073
Members, I was referring to my prior stated beliefs that hyperinflation was a currency confidence event that had nothing to do with the strength or weakness of the economies involved at the time of the Hyperinflation.
May I reference Argentina, China, Germany,Mexico, Zimbabwe, and countless others. Their economic situation was hardly a healthy growing one at the time of the upheaval.
Excuse me for my poor choice of words. I consider the authors at TAE to be the best and hold them in the highest regards.
My views on inflation have been instilled in me, a senior citizen, by over 60 years of relentless inflation and my current trips to the grocery store and gas station since the great credit contraction started have done little to change my view of it’s continuance.
My deepest apologies to all I have offended with My Mumbo Jumbo remark, it was intended differently but I can see it was a poor choice of words. Regards GOOctober 22, 2012 at 6:55 pm #6074tall tomMember
Nice graphics. Too bad it is wrong.
Inflation Deflation phenomenoa are RELATIVE. As with all phenomenoa which is relative there is no PRRFERRED Frame of Reference.
Imagine two concentric bubbles with you…the observer…standing on the surface of the inner one. Defate the bubble that you are standing on. The exterior bubble appears to be inflating.
Now…instead of defating your bubble you inflate it. The exterior bubble appears to be deflating. In both examples the exterior bubble size was held constant.
So yes you can experience a hyperinflation during a massive deleveraging. It matters upon perspective.
Until you can understand this you will have little clue as to what is about to overwhelm you.
I Cor 13October 22, 2012 at 8:58 pm #6075AnonymousGuest
Sometimes the belief that something “can’t” happen is the impetus for something that “shouldn’t” happen actually happening.
The belief that housing couldn’t go down nationally set the stage for “unimaginable” losses on positions that had no margin of error factored in. It is precisely that no margin was factored (AAA) that caused such leverage and therefor allowed the boat to become so grossly listing to one side.
The reserve currency and treasuries has likewise been abused precisely because it is “impossible” for a currency crisis to happen. It is precisely this paradigm that sets the stage for the gross abuse of this privelege and allows the conditionality for what “can’t” happen to do just that.October 22, 2012 at 9:01 pm #6076
It is USA deflation that is the myth. We don’t need theory to tell us what deflation looks like in the modern, post Breton Woods, pure fiat era, since we have a real world example, Japan. So what does a ‘real’ deflation look like?
For starters, the currency of the deflating country STRENGTENS, by 100%, over its main rival over the 6 year period from the point of bubble collapse. Then it meanders sideways for at least another 17 years, with any loss in buying power quickly regained.
The primary stock market index puts in wave after wave of new lows, and after 23 years finds itself still over 75% down from the top. Similar real estate behavior.
That is not even close to what we have in the USA. Whether you call the top of the bubble as being March 2000, or some time in 2007 or 2008, it doesn’t matter, our indicators are much closer to the ‘hyper inflation’ set up, not deflation.
Is it possible we could get the deflation outcome? Certainly. But very unlikely. The USA is slowly losing World Reserve Currency status, and this is inflationary.
We’re running a GAAP deficit of $5 trillion at the federal govt. level. Within two or three years it will be well over $7 trillion, approaching 50% of GDP!!! I think John Williams is rushing it a bit with his 2013 call for hyper inflation. I would say 2014 or 2015.October 22, 2012 at 9:03 pm #6077SteveBParticipant
tall tom post=5773 wrote: Until you can understand this you will have little clue as to what is about to overwhelm you.
tall tom, I can understand imaginary bubbles, but not how they relate to reality. Could you put your example into more real context? In particular, what would correspond in reality to the bubble your hypothetical observer is standing on?
TIAOctober 22, 2012 at 9:43 pm #6078
Here is a fix.
It matters upon [strike]perspective[/strike].
It matters only if you can finish the month with some money left in your pocket after having obtained the necessities of life.
You should get your prospective from the “entitled” poor, not the “entitled” rich.
Does anyone remember the price of a “Shave and a Haircut”?October 22, 2012 at 11:24 pm #6079
jal post=5777 wrote: Here is a fix.
It matters only if you can finish the month with some money left in your pocket after having obtained the necessities of life.
What on Earth are you talking about, Jal? In both deflationary (e.g. USA 1933) and hyper inflationary (Germany 1923) outcomes, people have nothing left over after obtaining necessities of life. In fact, in both outcomes a lot of folks starve to death, since they don’t get enough to eat.
When economies are distorted by government or quasi govt. actions, capital gets misallocated and the economy experiences booms and busts that more extreme than if the economy were allowed to self correct without govt. interference.
Once the asset bubble reaches a certain size, deflation OR hyper inflation is inevitable. (read Ludwick von Mises) The one you get depends on the government response. In the present case, we are headed full steam for hyper inflation. Of course there could be a fascist or communist coup, and the new leaders may opt for deflation. It is naive to think a democratically elected regime would do so, though.October 23, 2012 at 1:00 am #6080JackMember
Hyperinflation is happening in Syria and not in Canada or USA.
Here your 1 dollar can still buy a head of cabbage.
If it was Hyperinflation than your 1 dollar would have the value of 1 cent.
Nobody uses the word Hyperinflation to describe our current environment.
It is either deflation or inflation.October 23, 2012 at 1:24 am #6081
You’re missing the point, Jack. When you have an asset bubble the size of the NasDAQ tech wreck, or the USA housing bubble, you are going to get a devastating deflation OR hyper inflation. It just depends on the govt. policy response. The fact that they have been able to kick the can down the road this far shows you the power of having the world’s reserve currency. But this only delays the inevitable.October 23, 2012 at 1:59 am #6082JackMember
The kicking of the can down the road can go on for several years.
Maybe 4-5 years or more,nobody knows exactly how long it can last.
Japan has been doing it for over a decade.
It will eventually end but in the mean time the dollar still has the same value.
Also the laws of economics does not seem to be applying to this system because we are dealing with master swindler’s.
They have manipulated all commodities and most currencies.October 23, 2012 at 3:06 am #6083
I think you’re too focused on the US alone. And the US is so dependent on and addicted to international debt markets that hyperinflation is not possible for that reason alone. That’s also why what Japan goes through is not a good example, not in the way you bring it up. There’ll be no long slug for America, like Japan’s had over the past 20 years. Japan has been able to sell its products and debt into a thriving world economy (thriving on debt, but still), and cushion its deflationary fall that way.
For the US, that’s – obviously – not in the cards. But what the US can still do is sell its debt, and with ease (look at those yields!). The bond markets, however, will keep a very tight watch on that; too much and rates will skyrocket. As for why that hasn’t happened yet – a question many people will ask -, look at the graph depicting the gap between monetary base and money supply in my article.
(Hyper) inflation requires both 1) a strong and rapid increase in the money supply and 2) a strong and rapid increase in the velocity of money. Neither of these requirements are in the cards in the US today. Not at all. Something would have to trigger both, and there’s nothing out there that looks like a candidate.
In my view, this line from Puru Saxena says a lot: “As long as expectations in the real economy are not affected, increases in Fed-supplied money will simply be a swap of one zero-interest asset for another”. The whole financial world is gasping for breath, not about to jump up and go all ADHD on us. The opposite is happening. Less and less money is in motion. Injecting more credit is not about to change that overnight, there’s far too much inertia.October 23, 2012 at 5:55 pm #6084
If you look at worldwide debt as one big block, it is obviously still growing wildly, with USA federal (GAAP) debt increasing $5 trillion/yr alone. We know this debt will not get paid in today’s dollars.
I see three possible outcomes. The one you seem to be arguing is that bits and pieces get defaulted upon, one by one, in a positive feedback loop of economic contraction. Perhaps social security might be defaulted upon by increasing to the retirement age to absurd levels (85 years old?), as one example.
The textbook hyper inflation argument would be that the nanny state would bail just about everybody out, certainly itself and all the big players. They are already at this stage in Europe, and I agree with you that it isn’t proceeding very well.
The most likely outcome, I think, is some sort of debt jubilee. I don’t know the exact form(s) it could take, or even what would trigger the end game. I think it would be in conjunction with a one world currency being imposed on the planet by whoever it is that is in charge. It is quite apparent that no one is leaving the Euro, that is one clue we have to work with.
This would not be a text book hyper inflation, but close enough. You wake up one Sunday morning, and the news is that your paper money must be exchanged for the new currency, and bank accounts are frozen until they are converted. In effect, if you are a creditor, you get 10% of what you had, and if you are a debtor, most (if not all) of your debt is forgiven. If you are a saver, you get to keep 10% of your buying power.
The advantage of this ‘solution’ to the folks in charge is that it solves the problem of unpayable debt in a manner that enhances their power greatly. The other two solutions will lead to anarchy.October 23, 2012 at 5:57 pm #6085williamParticipant
So I am not sure you are addressing what I have seen most as the reason for hyperinflation. Several nations have indicated they intend to refuse trade in American currency adjusting who is the world currency of trade.
China has not been vague about this, they have been very direct. We will not trade in US dollars and have a 10 transition period. As a planned economy and not democratically elected. This is not a threat but a statement intended for preparation. After this they enacted the Pacific Trade Pac, placing a special trade agreement between China, Russia, and India primary with others in the peripheral. There is no intent in the future to trade with anything less than a pegged currency of this group. Indicated was the fact trade of manufactured goods will not be a point of interest for China in this period.
Knowing communist countries long term plan carefully. Knowing communist countries care through a plan relentlessly despite harm caused to people to reach a goal. Knowing the trade pac carefully takes care of the needs of the core and doesn’t need the US.
Knowing the American currency will not be the pegged international trade dollar, knowing all the current trade dollars will then be dumped back into the American economy, knowing this is not just the sentiments of the Pacific Trade Pac but also has been spoken of by the EU and also OPEC. Knowing this threat would this cause hyperinflation?
Not possible? Why should any country accept worthless currency in trade? Why shouldn’t the economies of real physical production, containing most of the world’s population, be the new pegged world currency?
Why should a minority half way across the world be the trade currency?
When the US is not the world trade currency do you expect hyper inflation?October 23, 2012 at 8:33 pm #6086
@ reply pipefit, I certainly am in sympathy with your point of the new currency for the old, but holders of dollars will never accept an instant 90% drop in their saved wealth to save the debtors, preposterous
Prefer sticking to the time tested workable solution of constant never ending inflation. Five years of a very workable 10% inflation rate will do wonders in the screwing of the saver and will make debtors smart again. The increased revenue to the tax man via the inflation will make his Social security bills and others manageable.
Of course bonds would crack open sooner or later in that scenario, but another round of drunken orgies in the stock market, commodity markets, and of course the real estate crowd will mute it’s effect and we can continue in our paper world of make believe for a while longer.
If Ilargi is correct, and we get a deflationary bust instead, then the question arises of how long are 7 billion people going to stand in a soup line, and how do you get out of that problem, everyone starting their own garden?October 23, 2012 at 10:13 pm #6087backwardsevolutionMember
“Recession. It’s baked in the cake and the oven timer is about to ring.”October 23, 2012 at 10:21 pm #6088
Japan is not a good example of how deflation typically plays out. As Ilargi points out, they were an exporting powerhouse exporting into the biggest consumption boom the world has ever seen. They also had a very large pile of money to burn through building their four lane highways from nowhere to nowhere, since they were the world’s largest creditor when their bubble burst in 1989. This is clearly not our situation.
No one will be exporting their way out of a global economic depression. In contrast, exporters are going to feel the pain big time as their markets dry up. We can expect trade wars and protectionism to abound. Take note Germany, Scandinavia, Australia, New Zealand etc etc.
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 infstruments 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.
I agree that the currency of a deflating nation strengthens. This is exactly why we have been writing about the value of the US dollar increasing, which it has done. The bottom came in a long time ago, and despite the set backs that are an integral part of a fractal market, the trend is up, and will be for some time. That’s not to say it will be for the long term – far from it in fact – but for now that is the case. We have made it clear that cash is a short term bet (of the order of a few years), and that the longer term strategy is to move into hard goods at the point when one can reasonably afford to do so with no debt.
Some could do so now, while others would have to wait for prices to fall, as they inevitably do in a deflation, but not immediately. Price movements follow changes in the money supply. We have been in a counter-trend reflation since 2009, and prices have risen as a result. They may continue to do so for a while after the reflation is clearly over, but then the trend will reverse. Prices will fall, but purchasing power will fall faster, meaning that prices will rise in real terms for most people. Those who have preserved capital as liquidity will find their purchasing power enormously increased, but most other will lose purchasing power because they will have nop access to credit, highly unfavourable employment cirumstances, rising property taxes and very little actual money.
The fiat currency regime will eventually descend into chaos as beggar they neighbour devaluations become the norm, but not everyone can devalue at will or at once. The market will decide relative values for the next while. Money will go from where the fear is to where the fear is not. It will be leaving the European periphery, and increasingly the entire eurozone, and flooding into currencies like the USD, the Swiss franc, the Swedish krona, and temporarily the British pound. It doesn’t matter if the US is downgraded. Market participants will ignore the ratings agencies and vote with their feet on a kneejerk flight to safety.
You say that the US indicators are much closer to the hyperinflation set up than to deflation. I would disagree of course, for reasons Ilargi has explained (plummeting velocity of money for instance). I would also point out that the conditions you describe simply reflect the top of the rally. People extrapolate the trend of the last three years forward, but fail to anticipate trend changes. We are in one. Many markets have topped already (gold, silver, commodities, oil etc), and the rolling top of the last year or so is about to claim the American stock market as well.
The rollover in the markets will drag the real economy down with it, with a time lag, since the time constant for changes in the real economy is much longer than for the financial world where value is virtual. We are headed into the teeth of the Greatest Depression, or at least the most significant one since the fourteenth century.
Hyperinflation is simply not on the cards any time soon. The depression will proceed for many years before that becomes a serious risk, unless you live in the European periphery that is, where currency reissue is a very real risk in the relatively short term. In those currencies, loss of faith in New Drachmas, New Pesetas or New Lira is very likely, and the countries will be cut off from international debt financing, with hyperinflationary results. That is not the situation in the US at all, and won’t be for quite a long time. Eventually, when international debt financing is dead and buried, then printing will be a risk and a loss of faith in the erstwhile reserve currency could be expected.
In the meantime, debts defaults are going to skyrocket, each one doing its bit to destroy the value of credit instruments, and substract from the effective money supply. This is already underway, and the great asset grab has begun as a result. Witness the asset stripping of Greece for instance.
In Europe, endless bailouts of sovereigns and the well-connected are doing nothing to increase the money supply or the velocity of money. In contrast, the ineffectuality of governments is doing nothing more than feeding the cycle of fear by demonstrating their ineffectuality time after time. They are trying to over come contraction, but are fighting an irresistable headwind. It is not going to work. Europe is already in contraction, and as fear will be increasingly in the ascendancy, that will only get worse.
Government obligations will be shed right, left and centre (by governments of the right, left and centre) because they will have no choice. Yes, this will lead to anarchic unrest, and yes this will be met with a heavy-handed repressive response. Social polarization is very much on the cards – governments vs people, haves vs have-nots, natives vs immigrants, employers vs workers, unionized vs non-unionized, Us vs Them in general terms. This will not be pretty, to say the least. Just because it is a bad thing does not mean that it cannot happen, or that government, by their actions, can make any difference to the outcome.
Bailouts are never for the little guy. The creditors hold the political power and write the rules. They will not allow debtors off the hook. Instead of repayment in money, they will take people’s freedom instead, making debt slavery much more real than it is today. Debts will not be forgiven, but sold on to more aggressive debt collectors. This is already happening in the US, where debt collection is becoming increasingly unconscionable. Debts will only be effectively forgiven when people have nothing useful to repay, not even their labour. By then the middle classes will probably be living in latter day Hoovervilles, like the Villas Miserias populated by the formerly middle class Argentines.
Savers will have all the buying power, IF they have managed to get their savings away from dependence on the solvency of middle men. Otherwise they will likely disappear in a giant black hole of credit destruction, as yet more excess claims to underlying real wealth.October 23, 2012 at 11:10 pm #6089
I actually agree with most of your points, and I think that a deflation of the type you discuss is a possibility. I think, in the fairly near future, say within six months, we should have a lot more clear cut idea where this is going. For example, by February or March we will be near the end of the annual favorable period for gold. Obviously, last year’s gold performance supported your argument. Two years in a row would give it a lot more credence. By February we should know how the ‘fiscal cliff’ will be managed as well.
As the USA economy contracts, the GAAP (and cash) deficit will continue to increase wildly. The two things supporting the USA dollar as world reserve currency are USA consumer consumption and the USA military presence worldwide. So military spending cannot be cut. But with imports dropping, the consumer side of the equasion will weaken. So we will be in the awkward situation of having to maintain military spending for a smaller and smaller role for the international dollar. The consequence, then, with fewer trade dollars to recycle, the QE-x process will be an increasingly bigger part of US Treasury sales.
We are really in new territory with our GAAP deficit at $5 trillion, or over 30% of GDP per year, and rising rapidly. There is a limit out there, and it is approaching rapidly. I think this is what forces the end game. Again, we have to wait and see what the policy response is. It could be deflationary of inflationary. In terms of social security, it has been a mixture: cutting social security taxes-inflationary, and lowballing COLA increases-deflationary.October 23, 2012 at 11:38 pm #6090AnonymousGuest
You are saying hyperinflation or even high inflation isn’t on the horizon and deflation and a strong dollar is. Does that mean all the US and European folks buying gold will be burned?October 23, 2012 at 11:52 pm #6091
Can you define Reflation?
We have been in a counter-trend reflation since 2009, and prices have risen as a result. They may continue to do so for a while after the reflation is clearly over
I know what deflation is.
I know what inflation is.
No idea what reflation is.October 23, 2012 at 11:59 pm #6092
Yes, many people buying gold are going to get burned. The spot price will fall a long way, but most people won’t get the spot price anyway. They’ll be desperate enough to sell their gold for a loaf of bread and half a dozen eggs at some point. Too many people buying gold are not taking care of more important things first, like holding to debt, holding liquidity (cash) and having some control over the essential of their own existence. Gold is an insurance policy to buy after you’ve done all that, and even then it’s no panacea. You can expect to have to sit on it for many years without having to rely on the value it represents, and it will not be safe to buy and sell it, perhaps for the rest of your life. Owning that concentrated a source of value has its price.October 24, 2012 at 12:07 am #6093
Viscount St Albans,
Reflation is a temporary return to an inflationary mode within a larger deflationary trend – a rally in other words. No market ever moves in one direction. Confidence, and therefore liquidity, ebbs and flows.
Deflation does not mean the money supply is contracting all the time until it reaches bottom. It looks more like a jagged lightning bolt, with strong down period interrupted by weaker up periods to a recovery high, but not a new high. Deflation plays out as five steps down and three steps up (at all degrees of trend simultaneously). In other words, the pattern is fractal. The larger trend is down when rallies lead to lower highs and lower lows over a long period of time.October 24, 2012 at 12:12 am #6094
Then by that definition….
We’ve been experiencing inflation (i.e. “inflationary mode”) since 2009?
What’s the difference between inflation and an “inflationary mode” ? This language sounds dangerously close to cookie inflation.
I thought it was an either or proposition. Deflation or inflation. You don’t do both at the same time. The rise in stock and commodity markets was due to temporary return to suspension of disbelief…..not an actual change in the dynamics of credit creation.
The central banks were pissing into the wind of a larger hurricane force trend…..etc.
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