pipefit
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@gravity, you said, “Of course any group of people whose wages afford a semblance of human dignity cannot effectively compete with slave labor, and global wage arbitrage tends to move all movable production into regions with the least labor protection,…”
I couldn’t agree more. You can’t compete with slave labor. Unfortunately, it is very difficult to go in reverse when exporting your production. Very hard to stomach higher prices, even for a just cause like human rights.
@chris You speak in anecdotal terms. However, the percentage of working age Americans with a full time job is at a multi-decade low, and dropping. Perhaps you are referring to no-benefit, part time jobs? I get mainly Indian sounding voices on the call center phone, except ObamaCare workers, and that is govt. work, not private.
Regarding crude oil, production is rising here and elsewhere due to sustained high prices. If Nicole and Illargi are right about deflation, the USA petroleum industry will be destroyed due to all their recent investment assuming at least $85/bbl oil. If you have a factory in the USA, the machinery costs the same to operate, regardless if the oil it burns came from North Dakota or Saudi Arabia. The deal breaker is the labor, and we can’t compete.
The key stat is USA gasoline consumption, it’s steadily dropping. This is closely tied to the lack of full time jobs. If we get a good dose of deflation, you are going to see gasoline/crude oil prices fall through the floorboards. There’s your indicator. Gasoline and and crude are drifting sideways, meaning that deflation has yet to get the upper hand.
Nicole said, “The QE money is not getting into the real economy and circulating, so provides no support for a wage price spiral.” and “At the same time, the value of many debt instruments is falling, and that is deflation.”
I can’t dispute that. But the bottom line is that the adjustment that needs to be made is to the ultra high wage scale in the USA, relative to the rest of the world (ROW). Since wages (and benefits, like pensions) tend to be sticky, almost immovable, the adjustment has to come via a weaker currency.
As more and more jobs are lost overseas, due the slow pace of dollar devaluation, the federal deficit gets bigger, which tends to counterbalance the deflationary effects of bond value destruction, and other deflationary events.
Theoretically, we could erect trade barriers, but since we are a high cost producer, that would be very inflationary, at least in terms of prices. This is probably a moot point, since I think that the folks running the show are committed to globalization.
What if we get a good jolt of deflation in the near term, and the dollar increases in buying power? That has got to lead to another huge round of job out migration, and a significantly larger annual federal deficit. I just don’t see deflation getting the upper hand until wages are more in line with the ROW.
Now that we’re in a global economy, it has become quite apparent that wages in the USA are so far out of whack with the rest of the world (ROW) that a serious adjustment is inevitable, and already underway. There are several ways this adjustment can be achieved. Call center jobs and anything whose output can be sent by phone or internet will be exported first. Next go manufacturing jobs, and finally even higher end jobs.
Also, the buying power of the trade deficit country can be devalued to help shrink the difference. This is why I don’t understand the ‘deflation’ talk. Any strengthening of the trade deficit currency (the USA dollar in this case) would just mean a further acceleration in the job exodus, which would lead to a further erosion of the tax base, which would widen the deficit, which I see as inflationary.
Since wages and benefits, such as pensions, tend to be ‘sticky’, the easiest ways to close the earning gap between the USA and the ROW is to export jobs or devalue the currency.
Since public sector wages are so out of whack, difficult to export, with powerful constituencies protecting their benefits, their numbers must be culled. But notice how a lot of these problems are sidestepped if the currency is seriously devalued. This won’t be easy, since there are so many dollars and dollar equivalents held by foreigners, but it appears to be the path of least resistance.
alan asked, “That is, they[prices] may be a lagging indicator, but still an indicator (after a lag), right? If that is true, then what do they indicate? If anything.”
Consumer prices have been rising at a year over year rate of about 8% or 9%, on average, for the last decade, if measured in the same way that they measured prior to 1980. That means that the inflationary forces are overwhelming the deflationary forces.
When deflation seemed to be on the brink of getting the upper hand, in 2008 and 2009, the y-o-y price increase plunged to only +5%. This tells you that if we get a huge dose of deflation like these guys are talking about, you will see it at the gas pump, the grocery store, and everywhere else almost immediately. Certainly within a few months.
They are using this ‘lagging indicator’ jargon because they can’t understand why prices keep going up, year after year, in a so-called deflationary environment. The answer is simple. There are always both deflationary forces and inflationary forces in every economy. And in our economy, the inflationary forces have the upper hand. If they didn’t, prices would be falling hard.
They point to bankrupt cities like Detroit, with a few tens of billions of dollars getting written off. But every year, the USA federal govt. adds $6.5 Trillion to the debt. There is the $1 trillion cash deficit, and another $5 or $6 trillion in (present worth of) new unfunded liabilities. The reason for this is that they have looted the Social security trust fund, and now must account for trillions in unpaid interest every year.
These guys here imply that the USA Federal Govt. will eventually default on their Social Security and Medicare obligations, and they might. But the result of that will be instant anarchy, or concentration camps, not deflation. You will see shortages and barter, which is a form of currency failure, which is a form of hyper inflation.
dave said, “…so its a poor substitute for the more accurate monetary indicators you describe.”
Why not just use y-o-y consumer prices, using the measuring metrics that were in place in 1980, before all the smoothing, seasonal adjusting, and hedonic replacement? In 2011 consumer prices were up 11%, y-o-y, and in the 9% to 8% range in 2012 and 2013.
When you have a mix of cheap oil and expensive oil, the price is set by the cost of production of the marginal barrel. Demand gets whacked, and the high cost fields get idled, and the price of crude plunges. In 2001 it plunged all the way to $11/bbl, but in 2009, during a far steeper recession, it bottomed at $35/bbl. The higher 2009 bottom represents the much smaller portion of the global oil production stream comprised of legacy cheap oil at that time. And today, legacy cheap oil is an even smaller % of the total.
We had near perfect growing conditions in the USA farm belt this past growing season, so I wouldn’t put too much hope in lower grain prices staying down. Besides, consumer food prices are a function of many inputs, not just grain prices.
Why don’t go to the grocery store in the next week or so and buy 100 items that you are sure to buy again in six months time and carefully record their prices and net weights. If there is massive deflation now, don’t you think the identical basket of 100 items will cost much less next May? What if that basket cost 4.5% more(y-o-y 9%)?
I think I’m in agreement with Jal’s view of money velocity. According to the chart in the article, velocity of money has been falling (more or less steadily) since 1997, and is now at a half century low. But oil and gasoline prices are far higher than the 2001 and 2009 lows, when money velocity was higher. And there exists the energy price head winds of a huge natural gas glut and rising crude production volumes (USA) and declining crude import volumes.
So if the problem is a quickly vanishing supply of cheap oil, velocity of money can go to zero and there still won’t be much cheap oil. And every year that goes by means even less legacy cheap oil in the mix.
We’re almost 6 years into this credit bust, and consumer and producer prices keep grinding higher. If there were any serious monetary deflation it would have bled through to consumer prices by now.
This isn’t to say there won’t be a stock market crash and massive contraction of the economy. However, it will be hyper inflationary, not deflationary.
Sorry I don’t have a link, but it is my understanding that the State of Michigan has one of the most public pension friendly constitutional protections in the nation.
If we see the .16 sent solution in Detroit, we’ll see this sort of decimation every where.
11. Loss of buying power to inflation, or hyperinflation.
The losses of the above 10 reasons will be worsened by reason number 11. For over two years now the USA dollar has steadily lost value to the comatose Euro, and this figures to continue, especially if one or more of the weak sisters is forced out of the Euro Zone.
The only thing propping up the dollar, as shaky as that support has been, is the USA military. But as the world gets increasingly militarized, this edge is losing its ability to keep things whole. Add to this all the bilateral trade agreements and I look for the dollar to grind lower.
The US Congress is starting to talk ‘austerity’ here, but it is a few decades too late. I’m actually in favor of shrinking the size of the federal govt., but this will result in a loss of gdp, and a smaller tax base in the short/medium run. QE to infinity is the plan.
Whether they block ObamaCare or not, the deficit is growing by $6 to $7 trillion a year. It is politically unthinkable that they will be able to cut social security or medicare. They don’t even have the guts to go after the relatively recent prescription drug benefit for Medicare, which has added trillions in unfunded liabilities onto the backs of the American taxpayer.
” The reason this [sales tax increase] doesn’t work is velocity of money. Which, like in Japan, is already very low in the US.”
Fair enough. But I think, generally, you are over emphasizing the importance of velocity of money. If you are in the era of cheap, easy to find, oil, one would expect the price of oil and its products to rise and fall with the velocity of money.
But we are now in the post-cheap oil era. All that is left to explore for, and produce, is expensive, marginal oil, like the Bakken. The velocity of money could go to zero, but nobody is going to sell oil for less than $90/bbl for very long. If they do, they will be broke, or they’ll have an Arab-Spring situation at their door.
If you were correct about velocity of money, the oil companies would be saying, “OMG, look at the velocity of money, it’s falling through the floorboards, we better not drill any marginal oil and gas plays!!!”
The price of oil is set by the marginal barrel. With each passing year, a larger and larger percent of the world’s oil falls into the high cost (> $90/bbl) to find, produce, and refine). Within a decade, that will be the new normal, and the marginal barrel will be at $150, the new price.
There could be a nasty depression, with declining demand. But that won’t bring back low cost oil. Most of it has already been produced and consumed. So time is working very much against the ‘deflation’ outcome.
@dave-you said, “That’s why when Volker raised rates to 20% it killed inflation. Nobody borrowing = inflation crushed.”
A couple of points. First, the fed can’t raise rates by a thousand basis points, like Volker did. In fact, they cannot even raise rates by 25 basis points (1/4 of one percent) without first shrinking their balance sheet by half a trillion dollars!!!
We’re not talking ‘tapering’ here. We’re not talking a halt to bond buying (QE). We’re talking a halt, followed immediately by the sale of a half trillion in current fed holdings. see https://www.hussmanfunds.com/wmc/wmc130617.htm
Secondly, most new money now-a-days is created by government entities, not private banks. For example, almost all of the mortgage market is now in govt. hands, and they are not concerned about making a profit. They have an entirely different agenda.
dave said, “A GAAP deficit won’t cause hyperinflation any more than me writing you a check for a billion dollars will end up injecting a billion dollars into the economy.”
True, this is precisely why Ponzi schemes are so successful. Only a fraction of ‘customers’ ask for their money at one time. Right up to the moment of default, people actually believe their investment is safe. You are looking around and seeing that Social Security, Medicare, VA beneficiaries, Fed. Govt. retired workers, etc. are all getting the benefits to which they are legally entitled. The buying power of their benefit checks is dropping at about 9% per year, according to shadowstats.com, but this is perceived as manageable.
But the unfunded liabilities are well over $150 trillion, an order of magnitude bigger than the economy. Time is not on the deflation side. It has been 6 1/2 years since the credit bust started in early 2007, and the fed’s balance sheet has tripled, the budget deficit has soared, the unfunded liabilities are increasing parabolic in fashion, and consumer prices are rising 9%/yr, using the measuring techniques used pre-1980.
The country is getting old and sicker, and the GAAP deficit will become the ‘cash’ deficit over time. Eventually, they will have two choices. They can print money to pay these benefits–hyperinflation, or they can rescind them-deflation. As you well know, the latter will not happen under the current system of govt., representative democracy.
The decision to eliminate benefits, if it happens, will be post military coup. And the complete failure of the even the guise of democracy will be accompanied by the failure of the dollar. So hyperinflation will either be the method of default on obligations, or will precede it.
“We will not have hyperinflation, we won’t even run a remote risk of doing so, for a long time.”
If by ‘long time’ you mean a ‘several months, or maybe a year’, that is a reasonable statement.
Rising interest rates are inflationary, and falling interest rates are deflationary. You can see this plainly in your solid analysis of the shale gas nonsense. They are buying up leases and drilling deep wells, and doing expensive frack jobs because the cost of capital is low. This has brought, and maintained, a glut of ng to the country. We also have a glut of houses and some other things, also attributable low interest rates.
So if you think the recent bounce in interest rates, such as the 10-yr treasury (stockcharts.com symbol $tnx) is temporary, and that interest rates will resume their 30 year path to ever lower levels, then I’d say your ‘deflation’ call is consistent with that thought.
But the fed is talking ‘tapering’, which would, if it were to happen, push rates up even faster then their current robust upward trajectory. My guess is that they will do only a token amount of ‘tapering’, and that interest rates will continue higher.
The USA dollar has been running basically even with the comatose Euro for almost two years. That gives one a good sense as to how weak it really is.
The key ratio to look at is the oil:natural gas ratio. (stockcharts dot com symbol $wtic:$natgas). As of yesterday’s (8/5/13) close it was at 31.91:1. But the btu equivalent is 7:1!!!!!
So, on a btu equivalent basis, oil costs more than four times as much as natural gas. This is an indication of current and ongoing intense monetary inflation, bordering on hyperinflation.
Because of the efficiency of modern oil tankers, oil can be sold any where in the world, with transportation costs only a tiny fraction of the cost of the product. Nat gas, on the other hand, cannot be transported beyond the continent where it is produced, except with exceptionally wasteful LNG Tankers.
Therefore, nat gas isn’t near the inflation hedge that crude oil is. We know the monetary hyperinflation machinery is running at full speed. the fed is buying a trillion is bond debt a year, with ‘out of thin air’ money. the USA federal govt. is running a GAAP fiscal deficit of close to $7 trillion ANNUALLY.
Dollars and dollar equivalents are going to completely fail, the only question is when. Much better to own a tanker full of oil when it happens, than a bank account with some (soon to be ) meaningless numbers in it.
The fact that they are chasing lesser and lesser value energy plays is consistent with this analysis. Put your money anywhere but in fiat.
ilargi post=7525 wrote: Ted,
Central banks don’t control this. Rising interest rates will squeeze most people sooner rather than later. Perhaps the main problem is most will think rising rates equal inflation. What will really happen is they will further stifle the velocity of money.
Rising interest rates are inflationary. It is falling interest rates that are deflationary. Antal Fekete has covered this at length in various articles. Just look at the 1970’s. When interest rates finally peaked, and started falling, so did prices.
Also inflationary are federal government fiscal deficits. For the fiscal year ended 9/30/12, using GAAP accounting, they ran a deficit of $6.9 trillion. The year ending 9/30/13 will see a larger one, and this will really take off and go exponential in 2014.
One could argue that they will declare everyone’s social security, medicare, and military retirement benefits null and void, but that will FOLLOW the collapse of representative democracy. That would cause the loss of world reserve currency status and hyperinflation.
green–I’m not sure why you posted a link to Chris Hedges article. He criticizes the corporate-military-industrial structure, especially their assault on the environment. It is their ill gotten gains that are propping up your pension, temporarily.
As the article points out, when you’re done borrowing and spending all the savings of the living, you borrow from the not yet born. When you’re done borrowing American’s savings, you borrow the savings of the rest of the world.
It’s over, man. A trillion was shoved up Saddam’s rear end, a trillion in Afghanistan. A trillion here and a trillion there. All the world’s savings have been used up. It’s nothing personal against you. There’s no savings left to fund a pension system.
golden–It doesn’t really matter whether Krugman is an imbecile or a thinly disguised spokesman for the Democratic Party. The bottom line is that we’re gonna have one those ‘stonking’ type crashes soon.
Ironically, it also doesn’t matter much if it is deflationary or hyper inflationary in nature. The scale of the destruction will be so vast, and rapid, that it will quickly annihilate the financial sector. This would actually be a good thing, if we actually had a manufacturing sector as the bulk of our economy. Unfortunately, we’re mainly a FIRE and Government type economy, so I would suggest that one plans accordingly.
Skip–My guess is that Krugman knows all that. Again, just guessing, but his agenda is probably to get liberal democrats elected to various state and federal offices. When viewed in this context, I think his comments are consistent with his agenda.
There’s no way out. Anyone with 5th grade math skills could tell you that. Come on. Debt plus the present worth of unfunded liabilities greater than 10 times GDP. But who wants to vote for a situation worse than Greece or Spain?
Much better to draw paychecks and receive invitations to fancy White House parties, right, lol?
Correct, professor. They will lop two, or more likely three zeros off the dollar and call it the ‘new dollar’. This is how it always ends, and this time around will be no different.
The problem is that the dollar is the world’s reserve currency. So dollar holders, like China, that are using trillions of dollars as the backstop for their otherwise bankrupt financial systems, have a small problem. If they dump the dollar too early, they precipitate its demise, and the demise of their own assets. If they wait too long, they get nothing.
Once this thing turns down, it is going straight down, as dollar holders rush to buy ‘stuff’ at any price.
skip said, “Going back to being sheep farmers terrifies them. So credit is what they want no matter what.”
That’s gotta be a large part of it. I’ve worked a mix of white and blue collar jobs over the last several decades. For 10 years I’ve been trying to get a small farming operation going on a small Appalachian property I own. It is brutally hard work to farm that kind of hilly ground. I like to get my hands dirty, but this isn’t for most folks.
Regarding the comments on ‘no work to do’, I doubt that. If there’s an abundance of everything, the cost of living should be going through the floorboards, not through the roof (the actual case). It is possible we’ve reached the stage where far more entrepreneurial spirit and talent is required, but it shouldn’t be that hard to rekindle, once the present welfare edifice fails.
“And so 60,000 young and educated Portuguese emigrate every year. I don’t know about you, but to me it’s starting to feel like a scorched earth policy.”
Agreed. Also, a flat or declining population is deflationary, as is an aging one.
“The point to take away from all this is that a storm cloud of uncertainties is taking shape above the carbon industry.”
Governments will not shut down oil fields to protect the environment. More likely, they will require cleaner burning gasoline, which will add greatly to the retail price, and they will require higher mileage, more expensive cars. The high cost per barrel fields will be shut down by the market place, not the government.
A lot of carbon that is on the books of energy producers will be ‘unburnable’, but not for the reasons stated. They will be unburnable due to simple economics.
The blog dieoff.org, in its first iteration, discussed one aspect of this, in depth. One cannot, economically, use more energy up in production (and exploration) then is produced. In that case, your operation is an energy sink, not an energy producing project. However, if you are pumping oil from a great depth, using an electric motor, that consumes subsidized (mispriced) electricity, the operator of the project might make a profit, but it still an energy sink.
Looking at the situation with a much wider lens, as the article on First Nations does, consider the value of clean, fresh water used in tar sands production. For a small pilot project, the cost to the nation of destroying a small fresh water resource might be considered nil. But what happens when you try to scale the operation?
Or consider the Middle East. Saudi Arabia and nearby countries are still producing cheap oil from the great discoveries of the early to mid 20th Century. Since the overall production costs are so low, it is fairly easy (economically) to justify vast military expenditures to protect the resource. But as more and more production comes from newer, marginal fields, these huge military expenditures make the overall cost uneconomic.
If these ‘extra’ cost are well hidden, by off budget measures, or Orwellian propaganda, the resource can still be exploited, but it is uneconomic. For the time being, the USA and other large nations are engaged in all sorts of off budget and Orwellian measures that are clearly unsustainable. When they grind to a halt, so will the uneconomic activity. This could be ‘bridges to nowhere’ in important Congressional Districts, marginal oil production, or other uneconomic activities.
As usual, a good thought provoking article. Although you hear it from time to time, people really should use the term ‘law of large numbers’ more often. The first time I heard it was in regard to the stock market. e.g. once a billion computers are in use, the next doubling of their use will be difficult, and technology stocks will crash. And that is of course what happened during the tech wreck, way before a billion units were sold.
If you look at Pakistan, you would know that the principal river is the Indus. During the dry season it doesn’t reach the Arabian Sea any more, because it is all pumped out as irrigation water. Where is ‘growth’ supposed to come from?
Looking at the USA, I wouldn’t worry too much about growth. What I would worry about is who is going to spray all the rats and mice in the 1/3 or more of the retail, office, and warehouse space that isn’t going to be needed shortly? The Boomers are starting to retire, and there isn’t a pool of savings available to sustain their spending.
The USA ran a GAAP deficit of $6.9 trillion in fiscal year 2012. This is one of those ‘law of large numbers’ deals that quickly becomes unsustainable. They can monetize a trillion dollars worth of debt per year through their bond buying program. But what happens when that goes to two trillion per year, then four? You can see that this is going to unravel very quickly.
If the economy was growing, unemployment would be much lower. The economy stopped growing several years ago.
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!!!
@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.
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.
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.
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 (stockcharts.com symbol $wtic:$natgas). This is fairly good proxy for inflation expectations. It has dropped a little recently, to 25:1, but oil is still selling at 250% premium to natural gas. Keep in mind that on a btu equivalent basis, the ratio should be 7:1, and during the 80’s and 90’s this ratio averaged 9:1 over a 20 year span.
Near the bottom of the deflation scare, in late 2008/early 2009, this ratio dropped all the way below par, to 6:1. If you see that again, you really don’t want to be anywhere near where there electricity, computers, any utilities, etc., since it means a deflationary collapse is at hand.
DaveF. said, “GAAP is about accounting for promises. Presumably, we should be putting money aside every year so we can make good on those promises, but we aren’t.”
You are half way there. dave. The govt. isn’t setting aside money, like they promise. AND, as a result of the failure of the average rube to figure that out, the average rubes aren’t setting aside money either.
This is where the inflation comes in. What if the govt., in a rare bout of honesty said, “please, please, please start setting a lot more money aside for retirement, because using honest accounting the govt., including ss and medicare, is completely broke? You know the answer. Spending would decline by 30% or more from present levels. That means that 30% of retail employees would be fired, and the people that the newly unemployed buy stuff from would be fired, etc. i.e. a deflationary collapse.
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. Also note, by not setting more money for entitlement programs, the fed. govt. has more cash on hand for money that can be dumped into the economy, such as salaries of govt. workers.
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.
Nassim,
Also, not having kids makes 20 somethings more mobile, as in my point about emmigration. I haven’t see that much about Spain, but neighboring Portugal is seeing a brain drain of their smartest, best educated youth.
About a year ago I read a Zero Hedge article about them going to Brazil. However, more recently I have seen articles about them going to former Portuguese colonies Angola and Mozambique. Also, a lot of them are low wage alternatives for Swiss corporations. If you have no job prospects at all, those backwater places might not seem that farfetched, especially if you have a good education you can use in an under educated 3rd world place where you speak the language of the elite class. And Switzerland must seem like Disneyland!!
So what class of people will be left behind in the PIIGS? The under educated, lazy, or otherwise unemployable, but hungary folk that need handouts to survive. Quite frankly, I don’t see the upside to ‘austerity’, but I’m not a banker, so what do I know, lol.
Thanks for the link, Nassim. I see that the only countries with even lower fertility rates are other European States, with very few exceptions. This is a natural consequence of following deflationary policies. There’s no hope for the future, so why have kids.
So with such a low fertility rate, once emigration gets going, population is going to tank hard, and the remnants of the economy tank harder.
I enjoyed reading the article. In the preface, Ilargi notes that modern man, including Spaniards, occupy more sq.ft. per person than in prior decades, and therefore, were this to contract, you would have a lot farther to go down, in price per sq.ft.
Along the same line, if you compare the population of Spain to that of the rest of the world where Spanish is either the primary or secondary language, I think you will see that 10%, or even 50% of the population of Spain could easily be absorbed. Particularly the USA, where Spanish is practically an official language and no visa is required for entry, for EU inhabitants.
I don’t believe the exodus from Spain is as great as from Portugal or Ireland, yet. Unlike most of northern europe, southern europe residents, particularly Iberians, have a vast continent, actually two continents, that can absorb them should they decide to leave.
Once you get into this situation (mass exodus) you are really getting to be exactly like Japan, which is currently experiencing population loss, though due to low birth rate there. Regardless, a contracting population is deflationary, since you have less economic activity.
“But these numbers are something else altogether. And I don’t get it. Do you?”
The most likely answer is that just about everybody knows we’re going to be hit with dollar devaluation tsunami of hyperinflation, starting in a few months. Any shortfalls in pensions or similar financial structures will be well hidden, forever.
As John Williams, of Shadowstats.com, just announced, his revised fiscal year 2012 federal government deficit, on a GAAP basis, is $6.9 trillion, near the top end of prior guidance. This is all out money creation on a truly historic scale.
Congress has, again, kicked the can down the road a few months, but the dollar cannot and will not sustain much more of this volume of deficit spending. With the economy producing little, if any, real, inflation adjusted growth, and no income growth, any significant austerity above and beyond the recent payroll tax hike will not make it through our polarized and incompetant national legislature.
Pension plans will soon have annual returns of 100%, or maybe 1000%, as a wave of hyperinflation hides every major policy error since August 1971. Every policy error except for their watered down CPI, which Williams says is about to get another dilution!!!
I pretty much agree with the entire article. I am little more optimistic with respect to one subset of the species, however. That would be homesteaders with internet access. There is a lot of technology and other really good ideas out there in the World, and many of them are making there way to the internet, for general use.
Here’s one incredibly simple example. Hugelkultur has ben around Eastern Europe for centuries (apparently) and Sepp Holzers has been practicing it in Austria for 40 years. But most internet postings on the matter are only a few years old, or less.
Basically, Hugelkultur is the practice of taking a fallen tree and burying it, and some other organic matter, under a foot of soil. Had the tree been left to rot on the surface, it would create energy (heat) and waste (CO2 and methane), with all three vented to the atmosphere over a 20 year period.
WITH Hugelkultur, all three are trapped in the soil, so you have less greenhouse gasses vented to the atmosphere, and you have heat trapped as well, for a longer growing season. You also have water trapped, making your bed drought proof!!!!
Ever read Asimov’s ‘Foundation Trilogy’? They knew the empire was going to collapse, so they designed a way to preserve centuries of technology, so the next wave of the race wouldn’t have to start from scratch, reinventing the wheel and everything else. Same deal here, I suspect.
>>>”Clearly, we’re well into the hyper inflationary phase.”
Clearly we’re not. With the levels of leveraged debt where they were and where they still are after 5 years, hyperinflation in not an option. John Williams has religion, and that is never good for analysis.>>>
Uh, no, John Williams knows how to read an accounting ledger, and apparently you do not. The actual ANNUAL budget deficit is $7 trillion. That is not opinion, or religion. That is a fact.
I can tell you where you are making your mistake. You are looking at a trillion in student loan debt, a trillion in credit card debt, and the unsecured portion of mortgage debt (another couple or so trillion).
Contrast that with $200 trillion in unfunded liabilities of the federal govt. that WILL NOT be defaulted upon, at least while the USA is representative democracy. You are on the wrong side of the argument by almost TWO ORDERS OF MAGNITUDE, lol!!!!!
We know how the story goes. We saw it in Weimar Germany. Hyper inflation first, fascism second. Watch and learn.
There is a 90% chance that we get hyper inflation within a year, and 10% that we get a crushing deflation, in my view. Whether one wants to argue that those odds should be reversed matters not. Either way, no one is going to consider Obama ‘great’. There is absolutely nothing he can do about it either.
The fed is monetizing almost 100% of government debt, and John Williams, of Shadowstats dot com says that the annual GAAP Federal Deficit is now $7 trillion, up from $5 T annually a couple of years ago. Clearly, we’re well into the hyper inflationary phase. Williams says he will have more precise figures next month.
How does one close a $7 trillion per year funding gap when the goods producing portion of the economy is about the same size?
The one thing ‘they’ could do, whoever the committee that bosses Obama around is, is to allow this hyper inflationary sequence to wipe out most debt, then default on the federal govt. debt and obligations (social security, medicare, etc.). If this is done as part of a controlled restructuring, the fallout might be manageable. The timing would have to be impeccable, to even have a slight chance of success.
Since I’m an optimist, I’m hoping this is the planned outcome, since anything else would be infinitely worse.
“That desperate US hyperinflation call of yours is what’s early, way early.”
You’ve responded to many of my posts that contain a mention of the size of the Federal budget deficit, as measured by GAAP accounting, without addressing that. Annual deficits that are 40% of GDP are hyper inflationary. Money creation on a grand scale. So, no, I am not early at all.
You can argue that social security and medicare are going to be eliminated, and maybe federal employee pensions, military pensions, VA benefits, etc. But that is an argument for the abolition of representative democracy first. And that will be the immediate end of the dollar as the world’s reserve currency, and its return to its inherent worth, zero. And anarchy, with a barter economy.
Barring a weather miracle, food prices are going way up in about six months, all over the world. Unlike the USA, where food accounts for a small percentage of the typical family’s budget, for the majority of the planet it is approaching half or more of the typical family’s budget.
Food importing countries are not going to have luxury of playing the ‘beggar-thy-neighbor’ currency self immolation game of destroying their own currencies to make their exports more attractive. They are going to actively move to strengthen their currencies to combat mass starvation. The USA, being a net food exporter, will see the relative value of its currency drop like a rock. Before 4th of July, 2013!!!!!
Sangell said, “Given that there is another debt account, the public debt, and that it has grown by about $10 trillion since 2003….”
Where on Earth did you get that, lol? The public debt is growing $6 trillion per YEAR, using GAAP accounting. See shadowstats and many others. The hyper inflationary phase is well underway!!!!
“That is, an economic recovery in the US is not possible when households still have to deleverage to the tune of $2-3 trillion.”
I don’t see too much mention of interest rates. With mortgage interest rates still dropping, I think you are a bit early with your call. I agree that the economy isn’t growing, but the main reason for that is that CPI and PPI is much higher than stated by the govt. and therefore REAL growth is much lower than stated.
Freddie Mac says a 30 year fixed is now 3.32%, and a 15-yr is at 2.64%. We are approaching the end here, but I think there is one more leg down.
The key web site to look at is https://droughtmonitor.unl.edu/. All the major grain charts are bullish, and corn and wheat super bullish. If we don’t get way above average rain/snow over much of the eastern half of the nation within five months, you are going to see food price inflation on a terrifying scale.
Once this food price inflation kicks in, next Summer, the fed will be powerless to stop it. Bernanke talks of removing stimulus at a moment’s notice, but as you pointed out, the economy isn’t growing, so he can’t raise rates. This coming hyperinflation will be one for the ages.
