Chris
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Eventually I agree that we will have deflation and then eventually I agree that gold will be a good investment. But the first must happen before the latter. Why? Because during the deflation people will be forced to sell anything and everything they have in order to try and pay their debts and or survive. That means that gold will decline right along with every other commodity as everyone will be trying to sell it for USD (can’t buy a loaf of bread w/ gold – at least not in the US). Now once the deflation ends and inflation begins in earnest then that is when you buy hard assets (including gold) with the dollars you’ve been saving.
My problem is that this is taking way longer than I ever thought possible. It’s why I rarely visit TAE anymore because the message hasn’t changed for 10 years while very little has happened, at least here in the US. Through my reading here and elsewhere I got out of the markets before 2008 but because I thought the whole thing was going down I didn’t get back in and missed out on doubling my money. Also, my wife told me to buy TSLA at $75 but I thought, that’s already overvalued for a company that doesn’t turn a profit. Look at where that got me. So next time there’s a “correction”, as soon as they announce QE4 I’m going all-in in the stock market. Some may call it picking up nickels in front on a steamroller but that steamroller is moving damned slowly and there are huge piles of cash laying on the road.
But how would that happen in practice? Who would decide who gets to have children and who wouldn’t? Politicians? These are the worst people on the planet but how much do you want to bet they would be on the list to have kids?
This is my problem w/ communism and other forms of economic organization. They only work when there is a surplus of resources. Once there are shortages there needs to be a mechanism to decide what is “funded” and what is not. In the absence of a market mechanism you’re left with politicians which IMO is worse.
Ing Inv,
I agree that there is a lot of “money” in the system, but my question to you is HOW will this money enter the economy? You talk about “turning on the spigots” but how would this work in practice? The money that the banks are sitting on are loans from the Fed so the banks will not simply drop $10,000 in everyone’s checking account. They could loan the money but if that was profitable they would have done it already. They cannot find credit-worthy borrowers who are willing to take on debt.
So again, only Congress can gift money to the people. Now I will grant you that the monster deficits they have been running have added money into the economy and had some inflationary effects. I think many of us have been caught off guard by how long they have been able to keep the machine cranking.
Again, all the money the Fed has “printed” has to be paid back. If they can’t loan that money out and get the fractional reserve money multiplier machine going that money will be extinguished when the loan is paid back to the Fed.
But I have to say that I’m not 100% confident in what will happen. That is why I hang out here as well as inflationist sites to try and get a clue. In the end we just need to keep our heads up and stay flexible.
PLNL (Isn’t that the name of Hornady’s reloading machine? I’m a Dillon man myself),
One of the bloggers I follow, Charles Hugh Smith, uses the following tactic when analyzing such things. Cui bono or, who benefits? High inflation helps debtors and hurts debt holders. While the USG is a large debtor, who are the holders of all that debt? Forget foreigners for the moment as they can’t vote. Domestically it’s insurance companies, pension funds, banks, corporations, etc. Those entities own the USG.
Next, high inflation can ONLY be created by Congress. Yellen cannot send $10,000 checks to everyone in the country. All of the money that the Fed has “created” is all debt-backed. Very little of that has found its way into the system. As for lending, it takes two to tango. Banks must be willing to lend and consumers or businesses must be willing to borrow. Low interest rates have spurred many to borrow but even that is running out of gas. Witness the horrible Christmas shopping season. So large amounts of money won’t enter the economy that way.
This brings us back to Congress. Do you really think that today’s Congress would launch a huge stimulus program? They can’t even agree on unemployment insurance. It would also require them to admit we aren’t really in a recovery and politicians will do anything to avoid admitting a mistake.
Here’s how I think this will go down. We will essentially follow the 1930’s playbook (and also the current European periphery). Something will happen to crash the stock market. We’ll have a classic deflationary crash with liquidity drying up. Cash will be king. The President will come out and talk about how the US will never default on their debts that we’re trustworthy and we all have to do our duty and fulfill our obligations and on and on. This will be “resource grab” by the elites that Nicole has talked about. Eventually the populace will become fed up with the depression and elect either a madman or “chicken in every pot” populist. This person will crank up the printing presses and start showering the people with money, jobs, etc. That is when we’ll see high inflation.
Bottom line is that the shift will not happen overnight. Those of us paying attention will see the swing. Keep your wits about you and your powder dry.
@pipefit, it seems like you’re living 10-20 years ago. Call center jobs are coming BACK to the US because wages in places like India are climbing fast and the quality of the service is horrible. Many companies are opening call centers in the South and Midwest and doing very well. Also if oil continues to get more expensive it’ll soon be cheaper to actually build stuff here than in China.
As for inflation/deflation, I am reminded of a device that Charles Hugh Smith often uses when thinking about these things. “Cui Bono,” or “who benefits?”. Who are the debt-holders in America (or the world for that matter)? The rich people/elites. What would happen to these people’s assets if the government devalued the currency? They would go down. Who controls the government? The rich people/elites. So they are not going to let the government devalue their assets.
My scenario is that something will trigger a credit event. Politicians will get on the TV and wax poetically about how America “must honor its debts” and on and on. This will start a strip-mining of public assets by the rich people, also known as austerity. At some point the people will have enough and will elect a populist President who promises a chicken in every pot. That administration will crank up the printing presses and inflation will be the order of the day.
But don’t get ahead of yourself. The deflationary crash is coming first, then high inflation.
pipefit post=8246 wrote: 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.
Huh? You think the govt will do nothing until one day on the first of the month they will go to print the SS checks and realize, “Ooops! There’s no money in here. Sorry!” Long before the money runs out they will come out and say, “we’re running out of money, we need to cut benefits, raise taxes, etc in order to honor our obligations.” We’ll get “austerity” just like they’ve been doing in Europe. That will be deflationary. The elites will squeeze the people as hard as they can as long as they can to extract as much wealth as they can. But eventually the people will get fed up and elect a populist President who will promise a chicken in every pot. That is where the tip into inflation may occur as the new populists in govt crank up the presses. This is exactly what happened in the US in the 30’s and only WWII saved us from high inflation. Since every other factory on the planet had been destroyed people had to buy all their stuff from us. They gave us gold and we paid off our debts.
So we will get deflation before inflation. Remember that high/hyper inflation is always and only a political phenomenon. The Fed CANNOT create high/hyper inflation because all of the currency they create is offset by debt. So there is no net currency creation. Only Congress can truly “print” currency by sending cash to the people who will spend them and the currency pool expands.
