A Quadrillion Dollar Deflationary Debt Raft
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Are you guys following today’s market action? To the average economic illiterate, it looks like the DOW is up almost exactly 1%, at plus 130 points (as of 1:30 PM)
But real money, gold and silver, is up 2.5 to 3.5 %, so, as measured in REAL MONEY, the DOW is actually DOWN, by a very significant amount, around 2% DOWN.
So you see, hyperinflation is getting started in a big way. But they are doing it in a way that the average rube doesn’t even know what is happening. If you are going to hyper inflate away a huge pile of debt, this is the way to it.
Pipefit and GO,
There are a score of articles on deflation in our Primers section. Why don’t you read those and then come back?
Hyperinflation won’t happen for a long time in the US. It is simply too addicted to the international bond markets. Which would punish any attempts at it relentlessly.
And by the way, gold is not going higher, it’s dollar that has been going lower lately. Check it vs the euro, for instance.
pipefit post=5207 wrote: Here’s where I think you are making your mistake, if, in fact I’m right, lol. (see, I’m not one of those chest pounding morons, lol). You deflationists seem to think that once you have established a linear or even exponential equation, you can extrapolate it far into the future or far along the ‘x’ or ‘y’ axis.
I’m afraid it is clear to me that hyper-inflationists are in fact the ones who take an equation and extrapolate far into the future. That is, inflationists are seeing consumer price inflation, and more significantly they’re seeing quantitative easing, and extrapolating that to infinity.
We’ve had four QE’s so far now (including today and Twist). They haven’t been big enough to get inflation going in a meaningful way (certainly not as measured by major assets and the velocity of money–if you’ll allow me to disregard “tomatoes and toothpaste” for a minute please, for all the reasons already discussed at length). Rather we still teeter on the precipice of deflation (which is why QE is announced again and again by the way!).
So the inflationist extrapolates QE forever (ie., printing) and disregards both its diminishing returns to generate inflation and the INCREASING resistance to it in the public and political spheres. To print to infinity has to have the public and political licence to do it. Even Draghi’s “print to infinity” is already limited by the German constitutional courts only weeks after it was announced.
Any announcement of QE to infinity is just a really amazing and quite desperate public relations stunt. There is no such thing as QE to infinity when at any time the political tides can turn (Ron Paul or a similar icon can be voted into office…or given that it’s too late for him, a turn in sentiment in Congress, etc.). So infinity is suddenly curtailed quite abruptly. That’s not infinity.
Some of the smartest deflationist analysis from Robert Prechter (who you guys refuse to read, I know) long ago predicted that QE would have increasingly diminishing returns. That the Fed would increasingly become vilified by the press and the people. That the Greenspans who were celebrated on the cover of Time Magazine as person of the year would be later seen to be inept, incompetent and even evil. And that is exactly what we are seeing. That is the current which the hyperinflationist equation is swimming against. Charles Hugh Smith makes some great points in this regard: https://www.zerohedge.com/news/guest-post-psychoanalyzing-fed
At some point, the desperation of the Fed will be recognized as just that by the people, and they will turn the political tides against anymore QE with a vengeance. We’re already that much closer–just look at how much the press and economic analysis of Fed policy has evolved over the past 10 years. The Fed is nearly universally hated (by all except Apple stock and gold buyers–and they’re the minority by the way–most people just want to earn a wage and get by). When the average person turns against the Fed, it will get ugly.
Not to mention the awesome power of the bond market to turn against the US and demand less easing. Probably an even more likely backstop than political machinations. As Ilargi points out in his succinct comment above, the US depends on the bond market. Bernanke appears to act unfettered–but the bond market is his master, and it has him on an invisible leash. When the bond market changes its mind–or even hints at it–there may be a very different landscape for Bernanke to operate within.
If this latest QE to infinity doesn’t soon deliver the goods in terms of job creation and salary increases (i.e., the “real inflation” we need to be thinking about–not tomatoes and toothpaste), then it doesn’t matter what Bernanke or his successor says to us. It will fail. And the Fed and its policies will become increasingly isolated. And I must mention (again) that QE would have to be significantly bigger than previous injections to get us any real traction in terms of inflation–this QE money is just disappearing into bank reserves (a bottomless pit) never to reach the people or the economy. There’s no inflation in that! That is the crux of the deflationist point of view, from my perspective. Not that QE wasn’t going to happen. Not that QE wasn’t going to blow some bubbles in gold or the markets. But that QE would happen and eventually fail to the point that the people and the bond market force politicians to turn against it. How long until QE fails to that point? That is the tipping point I look for as a deflationist. I am not yet convinced QE will do much more than plug the holes of vanishing credit, simply keeping us in this horrible purgatory of job losses, houses price crashes, and rising grocery store costs. Hardly hyper-inflation. Still a precarious thin sheet of ice between the world and devastating deflation.
So deflationists are doing the opposite of extrapolating current policies and trends into the future. Deflationists instead realize that this current direction is slowing and will reach a logical limit and reverse. The reverse could come incredibly quickly. Time will have run out to prepare. I think it has a limit though.
Ultimately, remember that the point of Bernanke’s QE is to get you to abandon your cash and put into into houses and stocks and anything else. He’s desperate to get you spending. And you’re falling for it hook line and sinker. Maker your money while you can. I don’t know how much longer this run up will last. Nobody does.
Thanks Ilargi for pointing out how gold isn’t doing nearly so well against the Euro and in fact this is as much about a dip in the US dollar than anything else.
@ Ilargi
Sir, I live in a world where everything is priced in US dollars, not the Euro.
Is that where you deflation argument, or dogmatic view is headed? That you didn’t mean it was to happen in the US?
I have read the articles, they are excellent, well reasoned, and well intentioned. I appreciate your efforts and Stoneleigh’s and wish to take the opportunity to thank both of you.
As many of my comments have made clear I think you were early and underestimated the ability of Central Banks to print; a common error of the deflation camp. Regards, GOThanks Ilargi for pointing out how gold isn’t doing nearly so well against the Euro and in fact this is as much about a dip in the US dollar than anything else.
I don’t know where that idea came from, but if you look at the chart below for the past 12 months and using the Euro as currency, you will see that gold has gone up by 10%. In the past month, it has gone up by 4% against the Euro.
Hi Ilargi, you said, “There are a score of articles on deflation in our Primers section. Why don’t you read those and then come back?”
Are any of them better than Prechter’s ‘Conquer the Crash’? I paid 7 or 8 ounces of silver for it 10 years ago (hard cover) and I see you can now get it for less than one ounce. Read it cover to cover a few times. Great reading. I’m sure you’ve read it.
Prechter says in that book that there will come a day when every penny in every retirement account MUST be invested in USA Treasury Bonds. As a talking point, let’s say Robert is at least part way right. Then they are going to FORCE people to buy some thing that is going to go a lot higher in value? Logically, that just doesn’t make sense. Why would they need force?
Far more likely, they will eventually dupe people into treasuries with some sort of favorable tax code treatment, then devalue violently, just like they devalued paper money in 1933.
Hi Ilargi
For now gold bugs are on the winnings side and it is not such a terrible thing to say you were wrong.
Those who bought at the peak period than that was bad.https://www.youtube.com/watch?v=x3EUzV5_TUs
A Rothschild Speaks – Listen CloselySorry that I didn’t listen to all of this video but I will later.
In one of these youtube videos he was saying that we should have QE3 and now that exactly what we have.
He is calling the shots.Sorry Nicole.
TAE is still my favourite financial blog.Hi pipefit
I liked what you said and it makes sense but just for fun take a look at this.
https://www.amazon.ca/Conquer-Crash-Deflationary-Depression-Expanded/dp/0470870907CDN$ 2.97
pipefit
you are getting all excited because gold goes up a few percentage points.
We do not have hyperinflation
https://en.wikipedia.org/wiki/HyperinflationMy friend it is speculators and the central banks playing games on poor suckers.
Hi Jack-The USA federal government is running a GAAP deficit of AT LEAST 35% of GDP per YEAR!!!!! That is hyper inflation. Period. It is money creation on a grand and pervasive scale, unless you are predicting that social security and medicare obligations will be straight up defaulted upon. But that is an anarchy prediction, not deflation. To go from a functioning paper money system to barter is the equivalent of hyper inflation in outcome, as paper money loses all value. Of course it will be a moot point for most people, as few would survive.
BTW, you are not towing the TAE party line with that ‘hyperinflation’ link of yours. It refers to the general price level. TAE folks say (correctly) that inflation, deflation, or hyper inflation, are a function monetary aggregates, not the consumer/producer price level.
GDP = $16 trillion. (probably overstated, due to the under counting of consumer price inflation and producer price inflation, but let’s go with it.) GAAP deficit is over $5 trillion, per YEAR!!!
Regarding gold/silver. They have been going up sharply vs. the usa dollar for over a decade. If you want to make a call as to when and where they will peak against the dollar, you could really make a fortune with the right call.
Hi pipefit
What you are saying makes a lot of sense and however you look at this thing the person holding money comes out loosing.Your explanation of hyperinflation is very good.
However if it was hyperinflation than wouldn’t the price of homes be worth more than they are now.
You have property value selling for $50,000 instead of $250,000.
If it was hyperinflation than they would have to be worth $1,000,000 or something like that.
I think the speculative factor for precious metals is something to consider.As for making a call for predicting the future price of the metals I am thinking that when interest rates start to move higher than something could happen to the prices.
Hi Jack,
I would argue that with wages being flat, and the cost of basic necessities rising rapidly, people are squeezed and cannot afford a major purchase like a home.
Here’s my main problem with the ‘deflation’ argument. As you must know, government stats are highly manipulated and seasonally adjusted, hedonically messaged, etc. So the real unemployment rate is 23%, not 8.1%, which you can read for yourself at shadowstats.com.
Also at the same site is a graph showing the year over year increase (decrease) in the main monetary measuring sticks, m1, m2, and m3 (as continued by shadowstats). They are up 10%, y o y, 10%, 6%, and 3% respectively.
So what do you think would happen to unemployment rate if money supply growth went to zero, the cusp of deflation? Way over 30%, that’s for sure. And if we had outright deflation, like a 5% y o y drop in the money supply? 40% unemployment, maybe 50%.
How long would society hold together and not experience a complete breakdown in the present order? A matter of weeks or months? I think weeks? Our jails are already near capacity, and states and local governments are broke. How are they going to lock up any more folks desperate to feed themselves by any method, legal or not?
So you can see, and deflation would be rapidly self extinguishing, resulting in anarchy or a helicopter drop of paper money. Actually, they would probably just mail out prefunded credit cards to everyone with $10,000 on them for free, unless you are an undocumented alien, then you only get $2000.
John Williams is a good data gatherer. But like so many of his ilk, he should shy away from interpreting it. Williams has predicted hyperinflation for years now. No rabbit in that hat.
That rising money supply thing is at least suspect, and more likely just bogus. Ambrose Evans-Pritchard has posted a whole slew of shrinking M2 and M1 numbers this year. Velocity of money finishes off the picture.
Not that it really matters: the debt MUST be deleveraged, there is no other option. Hence, deflation MUST ensue. Hyperinflation in today’s US is but a weird dream or theory that doesn’t deserve anyone’s serious attention. We can at least try to comprehend the basics.
ilargi said, “the debt MUST be deleveraged, there is no other option. Hence, deflation MUST ensue.”
Actually, that is not quite correct. You need a boolean statement at the end of your sentence. Let me finish it for you.
‘Hence, deflation MUST ensue, IF the currency remains intact.’
What are the odds of that? Slim and none. Far more likely we get anarchy, which is barter for a few and death for most, or the dollar is declared null and void and we start over with new money, commodity based or not.
The USA federal govt. has a negative net worth of way over $100 trillion, and I think there is another $50 trillion in credit market debt, much of it suspect. This exceeds the size of the non-govt., non financial sector part of the economy (the goods producing portion of the economy by an order of magnitude, then multiply by 3!!!!
You’re thinking of a scenario like an agrarian economy where people lose a 30% of their wealth and start over, having almost enough to eat all along. That bears no resemblance to the present case. The dollar cannot possibly be saved. Half the population is armed. The dollar will have no value in a barter/gang/criminal society.
Once we default on our treasury debt, imports get cheaper? That is not how it works in the real world. Once you default, you pay cash money, in the form demanded by the seller, and it won’t be paper. You’re confusing the USA with a net exporter. Yeah, for them there will likely be a hideous deflation. No way around it, just like here in the 1930’s.
ilargi said, “the debt MUST be deleveraged, there is no other option. Hence, deflation MUST ensue.”
Actually, that is not quite correct.
Yes, it is.
You need a boolean statement at the end of your sentence.
No, I don’t.
Let me finish it for you.
No need. I can finish my own quite well..
‘Hence, deflation MUST ensue, IF the currency remains intact.’
The deleveraging – re: deflation – will take place while the currency, i.e. the USD, is intact. It already is.
The USD is as doomed as all of them, but it won’t die tomorrow morning. There are far too many wild ideas of gold at $10,000 and US hyperinflation and the death of the USD around, and too many Americans who think they live on a financial island. People need to check their bearings in the face of these wild ideas or they’ll end up rudderless.
We don’t know how this financial scenario will play out.
Everyone is making some kind of prediction.Here he is saying
By Ambrose Evans-Pritchard
Zero interest rates will continue until mid-2015They are saying we could have QE4 and 5 and so on.
ilargi said-“The deleveraging – re: deflation – will take place while the currency, i.e. the USD, is intact. It already is.”
Actually, a lot of charts show credit market debt is still expanding, not contracting.
It is quite apparent that Obama will win by a big margin. The folks that run things behind the scenes absolutely love him. Once the election is over, you are going to see an escalation of the money printing on a world wide scale that will make QE3 look like child’s play.
They have already demonstrated, in spades, that the only rule is that their are no rules. I’m not sure where they will take us. I think they want to establish a one world socialist government, but a United States of Europe might be an intermediate step.
In any event, money is, and will be, what they say it is. Who are ‘they’? You tell me who got all that Washington Agreement gold, dirt cheap, and you have the answer to that. The guys in charge are acquiring gold. That is good enough for me.
You’re saying you can successfully fight the fed. Do you have any idea what the batting average is for your type, in the pure fiat, post 1971 era? Zero.
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