Currency Death Spiral

[FRED]

http://www.itulip.com/images/JRubino.jpgby John Rubino

In “The Coming Collapse of the Dollar,” James Turk and I said this about the effect of a falling dollar on other countries:
Recall that the only reason Japan or Europe can generate even their current meager rates of growth is the willingness of U.S. consumers to buy their Hondas and BMWs. As the dollar plunges, Japanese and European goods, priced in suddenly-appreciating currencies, will become prohibitively expensive for U.S. consumers, who will respond by buying U.S.-made alternatives or nothing at all. Correctly interpreting this change in buying patterns as a threat to their vital export sectors, European and Japanese leaders will respond with the only weapon they have left: monetary inflation. They’ll cut interest rates and buy dollars with their currencies, flooding the world with euros and yen the way the U.S. now floods the world with dollars. The result of these “competitive devaluations” will be a death spiral for all major fiat currencies, in which European or Japanese bonds will fare as badly as their U.S. cousins. This week the markets got a glimpse of how the competitive devaluation story might play out, as Europe confronted the impact of a “strong” currency. For the past few years, the European Central Bank has shown admirable restraint, raising rates in response to a surging money supply and allowing the market to set the value of the euro. This in turn has caused the euro to soar against the dollar, testing the premise that a system as fragile as Old Europe can’t tolerate an appreciating currency for long. And sure enough, France has begun lobbying for—get this—the right to vote on European Central Bank interest rate policies. From Bloomberg:
Trichet's Rebuke of French Government Widens Rift With Sarkozy
July 19 -- Jean-Claude Trichet's rebuke of a French demand for a greater voice for governments in setting interest rates deepened a rift with President Nicolas Sarkozy.
``Such declarations are not acceptable,'' European Central Bank spokeswoman Regina Schueller said yesterday on behalf of Trichet. ``The president of the ECB repeats with gravity that any attempt'' to influence the ECB violates the European Union's founding treaty.
Sarkozy has complained that the Frankfurt-based central bank's eight interest-rate increases since late 2005 have driven the euro to a record, threatening European exports. While Sarkozy has retreated from a challenge to ECB independence, he said last week he and Trichet are not ``on the same wavelength.''

``For Trichet, more lobbying from the French government undermines the credibility of the ECB and that's what worries him, which is why he's hitting back,'' said Julian Callow, chief European economist at Barclays Capital in London. ``The battle will get more intense as the euro continues to rise.''

The euro rose 0.2 percent yesterday to $1.3810 at 6:11 p.m. in Paris, retreating from a record of $1.3833 set earlier. It's up almost 5 percent this year and 55 percent since the end of 2001.

Sarkozy has criticized the bank's exclusive focus on inflation, and Trichet has questioned Sarkozy's tax cuts that would violate a French pledge earlier this year to reduce the nation's budget deficit.
Trichet’s European Central Bank won this early skirmish, of course. By law the ECB is independent, so a frontal assault by France or any other European country isn’t going to succeed—at first. But anyone who thinks the Eurozone welfare states will maintain their composure with the euro at, say, $1.50, simply doesn’t understand how democracy works in this late, decadent stage of its evolution. If the dollar keeps falling against the euro—as market forces pretty much guarantee that it will in the absence of major intervention—the euro system will have a nervous breakdown. Under pressure from exporters no longer able to sell to U.S. consumers, member governments will change the ECB charter and force it to cut rates, or they’ll start opting out of the common currency, or they’ll adopt wildly inflationary tax-and-spend policies designed to offset the rising euro.

However it plays out, the result will be a world in which competitive devaluations drive the price of all the major currencies inexorably towards their intrinsic value, which is the paper on which they’re printed. But it might be a while before most people notice. As surreal as this sounds, if the major fiat currencies are falling more or less in tandem, to unsophisticated eyes they’ll continue to appear to be stable. That’s been the case for the past few years, with the prices of oil, gold, healthcare and food soaring (which is another way of saying that paper currencies are plunging) while mainstream analysts proclaim inflation low and many of the world’s currencies “strong.”

But as this process accelerates, the fiction of strong and weak currencies will be harder and harder to sell. Inflation will migrate from “good” things like houses and stocks to life’s necessities, and the link between prices and the unit in which prices are expressed will become clear to everyone. Then the death spiral begins.

[Tet]

http://www.itulip.com/images/JRubino.jpgby John Rubino


In “The Coming Collapse of the Dollar,” James Turk and I said this about the effect of a falling dollar on other countries:Trichet's Rebuke of French Government Widens Rift With Sarkozy

July 19 -- Jean-Claude Trichet's rebuke of a French demand for a greater voice for governments in setting interest rates deepened a rift with President Nicolas Sarkozy.

``Such declarations are not acceptable,'' European Central Bank spokeswoman Regina Schueller said yesterday on behalf of Trichet. ``The president of the ECB repeats with gravity that any attempt'' to influence the ECB violates the European Union's founding treaty.
Sarkozy has complained that the Frankfurt-based central bank's eight interest-rate increases since late 2005 have driven the euro to a record, threatening European exports. While Sarkozy has retreated from a challenge to ECB independence, he said last week he and Trichet are not ``on the same wavelength.''

``For Trichet, more lobbying from the French government undermines the credibility of the ECB and that's what worries him, which is why he's hitting back,'' said Julian Callow, chief European economist at Barclays Capital in London. ``The battle will get more intense as the euro continues to rise.''

The euro rose 0.2 percent yesterday to $1.3810 at 6:11 p.m. in Paris, retreating from a record of $1.3833 set earlier. It's up almost 5 percent this year and 55 percent since the end of 2001.

Sarkozy has criticized the bank's exclusive focus on inflation, and Trichet has questioned Sarkozy's tax cuts that would violate a French pledge earlier this year to reduce the nation's budget deficit.


My hat is off to the French, they seem to be the only people that put up at least a little resistance to the independent/private central banks. Wasn't it de Gaulle who got the whole game started by turing in his d0llars for gold to begin with? Keep in mind the US has no intention of ever paying back the world for the oil, cars, trucks, clothes, computers and other great stuff that the world sends to us in exchange for green pieces of paper and the more green pieces of paper the world needs to collect the better off we are. Nice of the Bank of England, the ECB, the Bank of Japan and hell even the Bank of China to raise their rates in order to keep Uncle Buck as weak as possible. It's almost like these private central banks are some sort of club.

[Lukester]

I'm working up my courage here to ask some potentially naive questions. But I figure if I don't ask, I won't get the answers that may help me make some good positioning calls.

This Rubino article has me wondering if it's truly better to be parked in 'hard national currencies' and treasuries (denominated in currencies!), or otherwise to emphasis 'lots of cash' (what's hard cash versus rotten cash?) to better weather any approaching debt deflation.

Couldn't competitive currency devaluations, dancing together faster and faster to prop up international commerce, totally screw up this otherwise conservative "hard currency safe-haven" strategy?

Wouldn't all countries be doing their utmost to protect their export driven economies any way possible in such a generalized downturn? In recent years, the name for that game has been to knock their currencies down relative to their trade partners. This is the politicians equivalent of electoral survival - do what regains jobs for your constituents (rebuilding exports ranks high) - and the most trusted tool short of enlightened economic policies must be percieved to be 'currency devaluation'.

I can't help but wonder therefore, whether precious metals function as "inflation hedges only" in a 21st Century currency crisis. What is a global currency crisis? Is that inflationary? Is there any way it could be deflationary? If the eye of the storm were the currencies, why would precious metals inevitably see a big exodus during any concomitant large debt liquidation? Flight out of precious metals - back into to what?

Maybe they might see a really big wobble as panicky sellers dumped everything, but then start looking pretty firm shortly afterwards as people began to cotton on to the panicky determination of all industrial nations to weaken their currencies to maintain some minimum of exports?

So if currencies as well as debt-denominated assets are where the next big problem is going to be, aren't even 'hard currencies' uncomfortably close to the financial asset class (cash money) that's going into global convulsions?

The investing public is "fleeing to safety" in treasury paper and "cash" every time the markets wobble - and it's looking more dubious as to where it percieves that safety with every passing quarter. We already smile a bit to hear of the "flight to bonds" when the stock markets stumble, and it's early days yet. How long until we are smiling at the thought of a "flight to treasuries" or even "flight to cash"?

The currencies seem to strengthen and weaken relative to each other, but aren't they all more or less wilting together under the pressure of the competitive devaluations of the two or three largest currency groups? What currencies genuinely escape the vortex when it builds up some momentum?

Considering all this, why wouldn't one want to be in the "anti-currencies" through the entire process? Or putting it otherwise, what's wrong with emphasizing precious metals in an upcoming storm where currency melt-downs will be one of the main courses of the meal?

Can someone enlighten me as to what I'm not getting about potential deflation in this picture ?

[jk]

lukester, no single investment will thrive under every scenario. the investment that protects you from debt deflation is not the investment that protects you from runaway inflation.

[Lukester]

JK,

Yes it's understood. But isn't the consensus that continuing competitive currency devaluations are a given? Which nations or blocs (if any) do we think might even approach a "real" strong currency policy over the next decade while the US, the world's primary consumer, exits as the senior currency?

[zoog]

lukester, no single investment will thrive under every scenario. the investment that protects you from debt deflation is not the investment that protects you from runaway inflation.

I was starting to think to myself: "well the last gold bubble we had was during a period of high inflation... yet in the midst of the 1930's deflation, they raised the price of gold in dollars. seems like gold might go up either way if there is government intervention to that effect during a deflation."

But I did a little searching and found this article (amongst countless) explaining the key difference between then and now: we were still ostensibly on a gold standard in the 1930's, and gold itself could actually be used to repay debts.

http://www.safehaven.com/showarticle.cfm?id=2925

Specifically, during deflationary episodes of the past gold was the official money of the land -- gold coins either circulated as currency or the world's senior currency was convertible into gold at a fixed rate -- and, as a result, it represented liquidity. All taxes could be paid in gold, all debts could be repaid in gold, and almost all purchases could be made in gold. Under such a monetary system, when the purchasing power of the national currency rose as a result of deflation there was a concomitant rise in the purchasing power of gold.Under the current monetary system gold is not the official form of money and therefore does not represent liquidity. In particular, taxes cannot be paid with gold, debts cannot be repaid with gold unless a special agreement to do so is made between the borrower and the lender, and more than 99% of purchases cannot be made with gold. Therefore, in a situation where dollar-denominated obligations were huge and the supply of dollars was contracting many private investors would probably be forced to sell their gold in order to obtain the dollars needed to meet their financial obligations. Also, under such circumstances those who were sitting on a large amount of cash and were therefore under no pressure to sell anything would be far more likely to invest their cash in US Treasury bonds than invest it in gold.The last remaining official link between gold and the dollar was severed in 1971 and, not coincidentally, deflation hasn't occurred since that time. Unfortunately, this means there aren't any historical examples of how gold performs during deflation when the metal is not the official form of money. However, we can get an idea of what to expect from gold if deflation were to occur now by ... looking at how silver performed during the 1930s.Cutting to the chase, the average price of silver during 1932 (the peak of the 1930s deflation) was about 50% lower than its average price during 1929 (just prior to the start of the deflation)It certainly makes no sense to just buy gold and assume that you are going to be fine regardless of whether we get inflation or deflation.Er, ouch. Sorry Lukester. Mind you, I'm pretty bullish on gold and silver.

[bill]

Which nations or blocs (if any) do we think might even approach a "real" strong currency policy over the next decade while the US, the world's primary consumer, exits as the senior currency?

It is yet to be determined what global reserve currencies system will emerge but the shape of things to come have been talked about in a article recently posted on the CFR web site.
http://www.foreignaffairs.org/20070501faessay86308/benn-steil/the-end-of-national-currency.html

[jk]

JK,

Yes it's understood. But isn't the consensus that continuing competitive currency devaluations are a given? Which nations or blocs (if any) do we think might even approach a "real" strong currency policy over the next decade while the US, the world's primary consumer, exits as the senior currency?

i don't think it's going to be a very tidy process. i think the dollar will remain the reserve currency for a long time, for lack of a single, sufficiently liquid and freely convertible alternative. we will go through a time of multiple currencies being used - look at iran selling its oil for yen and euros, and russia making noises about perhaps asking for payment in rubles. but no single replacement will emerge until we've gone through a period of currency chaos. no one wants a strong currency these days, but as food prices rise in china the chinese might start seeing some benefits of a stronger currency. but that would likely mean that they allow their currency to appreciate [relatively speaking] slowly instead of glacially.

[Lukester]

Many thanks JK, Bill, Zoog for your input. I'm putting all your observations together as noted, to derive some combination:

So we have a high probability of stressed out currencies, with the anchor currency torn loose from it's moorings and drifting down, and with all other currencies tethered to it by varying imperatives to constantly jigger their currencies (mostly downwards) following the USD to guarantee the survival of their export sectors.

Due to lack of senior currency substitutes, and the glacial pace of senior currency entrances or exits, we have an unstable general currency situation that is unlikely to be resolved short term (for years to come?).

Structural global instability in currencies suggests high likelihood that nations will continue to improperly use "monetary aggregates" to steer through international turbulence in exchange rates following the USD. So currencies would likely move yet further away from being governed conservatively relative to GDP, and would increasingly be used as just tools for comparative adjustments of trade.

We've seen how in the past half dozen years high rates of US monetary growth tended to infect growth of same in many other trading blocks. World EX-US is not inoculated to US inflation. They must either sterilize, or refute dollars in trade as long as USD continues to be abused. No reason to believe major trading partners (i.e. industrialised world) can develop effective inoculation against US exported inflation as there is none, when you accept newly issued fiat USD for your manufactured goods.

US currency abuse is likely to intensify, as per John Williams (Shadsowstats) and US Comptroller General Walker's forecasts of how 50 trillion of unfunded liabilities must be handled.

Therefore unless the world somehow gets inoculated from currency abuse spillover, the same will continue to spill into global monetary aggregates, as no-one is forecasting a meaningful exit from USD as senior currency for the next five - ten years. Sounds like inflation.

US will print (a favorite Marc Faber term) - US is the "world-champion" consumer, ergo many others even with fundamentally sound currencies will be under extreme pressure to "play ball" and abuse their currencies in tandem.

Can someone explain to me then ( in uncomplicated terms !) the mechanics of process, whereby deflation, i.e. increase of the comparative purchasing power of a nation's MONEY/CURRENCY, can creep into this new universe where everyone is tethered to a USD which is terminally boxed into self-abuse by unresolvable debt obligations?

Here is a "senior currency" which is going to be frantically proliferated out to the horizon, to cover over 50 trillion of unfunded US liabilties. So what I'm not grasping is that 'fundamentals really don't count" for example, during a hypothetical derivatives implosion (not so hypothetical), which is supposedly a massive deflationary event.

Say derivatives go pop and quickly dissolve into a gooey excreted puddle. Say that happens even partially, and the G8 manages to put out the fires by massive infusions of "liquidity".

Everyone scrambles for the currency of choice for settlement of debts, which is USD? Or say they all thought the USD looked fishy and took a risky flyer and flocked instead to the Euro, or even some newly formed, theoretical super strong Asian common currency. How much confidence will this massive pool of global wealth (looking frantically for a refuge) have in even a non-USD senior currency, when they all remain tethered to USD in trading bands due to a tightly interlocked global economy ?

There may be more, but I can only vaguely see two possibilities. Either things bumble along as they are, which remains quite inflationary due to the USD fiscal imperatives (Wlliams and Comptroller Walker outlined), or there is some 'resolution event" large enough to precipitate a large global liquidation flight to currencies as the most liquid medium of settlement - an event which is presumably powerfully deflationary.

This is the case against being overly exposed to the precious metals as an inflation hedge.

In the latter case, how long does this large pool of global wealth distilled from the derivatives puddle remain in currencies and prime sovereign debt ? Does it actually stay put there for more than a few months after the liquidation event? Where can it go?

Of course, as everyone wants to climb into the sovereign debt, the currency it's denominated in presumably (??) soars in value - so quick witted traders of the event (which they miraculously managed to time) can pile into that sovereign debt or hard currency at the appropriate moment, and then pile out at the top of that event for a nice trading profit.

What about those who are not traders by skill, and are looking for the position with the widest set of parentheses around the equation?

I'm willing to accept that all the above fundamentals regarding the lack of soundness of currencies and sovereign debt don't count in a panic, and that everyone suddenly regards precious metals as useless commodities and craves paper for the instant settlement of obligations.

After such a melt-down, all the (now massively over-subscribed) prime sovereign debt remains denominated in CURRENCIES, which prior to the meltdown were all increasingly obviously, and for a good number of years, on a downward trajectory together?

I wonder how quickly after the flight into sovereign debt those vast pools of liquidated global assets, now all crammed like sardines into one sovereign debt asset class, would be looking for a new home? Six months maybe?

Surely equities would be largely shunned after a large financial crash due to it's being a deflationary event, and their being the most volatile class - In a world (pre-crash), where US sovereign debt had already become widely distrusted as "unsound", bonds and treasuries of junior currency nations might be to some extent isolated, inadequate to demand, and over-subscribed ?

If US sovereign debt in such a scenario receives a weaker bid, that means the greater part of the entire global pool of liquidating assets fleeing derivatives would pile into the sovereign debt and cash of junior currencies?

The fundamentals of that sovereign debt in the US, which are potentially even catastrophically bad (according to Shadowstats and Comptroller General), may severely tarnish these 'safe-havens' reputation worldwide in the junior currency economies during a global panic as well. Or mabe not. But what's sure is thatl all other global sovereign debt is denominated in much smaller volume currencies. The EURO is the only alternative with depth of market, and is arguably compromised for the task also, due to splintering and diverging of member interests.

Given all the above in this 21st century quagmire of transition of senior currency, are we to believe that the historic global senior bank settlement currency, namely Gold, will significantly decline in such a massively deflationary event? It's a tiny market relative to the currencies and sovereign debt. It is microscopic in relative size. Are we to believe, in a scenario where the senior sovereign debt has fundamentals as bad as the US has today, that gold would receive a weak bid, let alone a FLIGHT, in the above deflationary scenario?

If someone convinced me that gold would sustain a significant hit in such an environment I'd look seriously at divesting a good portion of what I hold. I'm just having some difficulty seeing the steps in the process, with these fundamentals.

The one third of the world that will be challenging the present leading industrial economies for economic pre-eminence in 30 years, the part of the world in fact most likely to propose a new senior currency, has a much greater affinity, and respect for gold than we do in the "old" industrialized world.

We've been educated to understand gold as having a large commodity component. Everyone's comfortable with it in an inflatonary scenario - but everyone takes it as a given that in the above deflationary scenario it's going to receive no bid at all. I think even a tiny hedging bid in a global deflationary collapse would make it soar, as it's marlket is minuscule compared to global currency pools. That is it's asset and it's liability, but frankly more on the asset side.

Can someone rescue me from these delusions before I get clobbered in a potential deflation? :confused:

[Ed]

I suggest that you start with thinking about TIPS (aside: these are under-talked-about because they generate little $ for the middlemen/talkers -- of all stripes!).
Assuming the USA continues existing, and its UST keeps its word, UNchanged consumer purchasing power is assured (plus 2.5+ %/yr real yield), whether inflation OR deflation.

If deflation, cash would be be better, getting you increased consumer purchasing power -- BUT I figure that persistent consumer price deflation is very unlikely: remember (1) the Fed’s expressed FEAR thereof a few years ago (helicopters ...), (2) the Fed prints the money, and (3) the USA historical co-occurrence of consumer price deflation and the Depression.

Some about TIPS is here:
http://homepage.mac.com/ttsmyf/recDJIAtoRD.html

I do remember reading that some seat locations have better statistics than others if the plane crashes -- but nothing like missing that plane.

[WDCRob]

Lukester, that's a very well articulated post IMO. If you haven't read back on some of the historical articles here from EJ they cover this subject pretty well.

Can the US have a Peso problem
Disinflation, then lots of inflation

That's from memory, so the exact titles may not be right. There's also one about Grisham's Law and how it will apply when the world's central bankers all inflate as you describe above. And I believe there's one on the death and emergence of past currency regimes.

I don't claim to be an expert (in fact, I claim NOT to be), but IIRC the central thesis here follows your scenario to the letter, with EJ saying the result is massive liquidity pumping and an explosion in inflation. Even if we enter into a depression in terms of production and economic activity, the currencies will be devalued as everyone throws increasingly worthless paper at the problem.

[jk]

lukester, well put. ej's take is that we won't have deflation. others, e.g. mish, argue we will. i think it's a matter of timing and the speed with which processes unfold. we could get deflation because most people count as financial wealth assets which they assume are liquid. but with the exception of gold, real estate, factories, i.e. THINGS, assets - financial assets- are all someone else's liability. now governments can always pay debts denominated in their own currencies, but the liabilities of non-governments can be liquidated by failure instead of payment. liquidity is a coward. thus, in a crisis, a lot of assets could suddenly go to zero, much as the cdo's held by those bear stearn's funds suddenly didn't have a bid. hey, sorry investors, you're money's gone. but if it doesn't happen really quickly we'd have the fed drop rates to zero, providing instant relief for borrowers with floating rate debt, and then, if necessary, bernanke wrote in his famous, "why it [deflation] won't happen here" paper, the fed would resort to "unorthodox" interventions, monetizing assets of all kinds, either directly or via the banks. that's "poom."

[Lukester]

Many thanks to you all for your input. I will be reading your comments with care when or if such KA events occur. That's why people are drawn to this website, as they can get a really valuable cross-section of informed advice. The sum of your opinions provides valuable input indeed.

[grapejelly]

lukester, well put. ej's take is that we won't have deflation. others, e.g. mish, argue we will. i think it's a matter of timing and the speed with which processes unfold. we could get deflation because most people count as financial wealth assets which they assume are liquid. but with the exception of gold, real estate, factories, i.e. THINGS, assets - financial assets- are all someone else's liability. now governments can always pay debts denominated in their own currencies, but the liabilities of non-governments can be liquidated by failure instead of payment. liquidity is a coward. thus, in a crisis, a lot of assets could suddenly go to zero, much as the cdo's held by those bear stearn's funds suddenly didn't have a bid. hey, sorry investors, you're money's gone. but if it doesn't happen really quickly we'd have the fed drop rates to zero, providing instant relief for borrowers with floating rate debt, and then, if necessary, bernanke wrote in his famous, "why it [deflation] won't happen here" paper, the fed would resort to "unorthodox" interventions, monetizing assets of all kinds, either directly or via the banks. that's "poom."

Write-downs and writeoffs shrink credit but they don't necessarily shrink money supply, do they?

This is where the deflationists err.

We can have a credit crunch, high interest rates, massive defaults, etc. but it is very unlikely (impossible) that CBs won't respond by printing massive amounts of money. Governments can monetize anything, drop money from helicopters, etc. How can we have deflation in this situation? We can't.

Currencies are all headed towards zero value. It won't be a straight line getting there though.

[Lukester]

Grapejelly -

Correct me if I'm wrong, but I already figured from reading your other posts you were one of the more committed PM holders here.

FWIW, on the topic of "irreversible deflation" ensuing - I've always found Mish's letters about dire and irrevocable deflation to be indigestible. It must be a quirk of mine, but he always drives me up a tree referring to his prior posts as "missives".

Why can't these guys just call them plain old "letters" without the fancy name?

The intro line on each e-mail begins "Mish called me today and said ..." ALL of them - same intro - going back for six months! Enough already!

His publisher stuffs my mailbox full of "missives" which I stopped reading a good while back. I guess that leaves me a bit uninformed about potential deflation from one of its' most well known proponents.

Now, can I possibly interest you in an full two-year de-luxe subscription to the Elliott Wave newsletter? We can have it mailed to your door ... etc ...

[bart]

Three charts that might help, at least on the intermediate and longer term:

http://www.nowandfutures.com/images/economic_cycle.png



Martin Armstrong's Global cycles:
http://www.nowandfutures.com/images/global_cycle.png



The very long term currency picture from AEIR:
http://www.nowandfutures.com/download/gold_vs_currencies_ppp1900-2005_from_AEIR_report_rr11_pdf.png

[jk]

bart, how do you interpret armstrong's chart? i've found armstrong's stuff interesting, but when he revealed that the cycles relate to the value of pi i rolled my eyes. i had preferred to think they were either purely empirical or related to some economic cycle. anyway, i know the inflection points do not, supposedly, relate to any particular market, and may just be volatility markers, but i don't see anything in feb '07 that relates to the high peak in the graph. yes, there was a sell-off of a few percent in the equity markets. i also looked at the crb, gold, oil, yen, euros, tbonds. do you put any credence in armstrong, and if so how do you interpret it?

[grapejelly]

Grapejelly -

Correct me if I'm wrong, but I already figured from reading your other posts you were one of the more committed PM holders here.

FWIW, on the topic of "irreversible deflation" ensuing - I've always found Mish's letters about dire and irrevocable deflation to be indigestible. It must be a quirk of mine, but he always drives me up a tree referring to his prior posts as "missives".

Why can't these guys just call them plain old "letters" without the fancy name?

The intro line on each e-mail begins "Mish called me today and said ..." ALL of them - same intro - going back for six months! Enough already!

His publisher stuffs my mailbox full of "missives" which I stopped reading a good while back. I guess that leaves me a bit uninformed about potential deflation from one of its' most well known proponents.

Now, can I possibly interest you in an full two-year de-luxe subscription to the Elliott Wave newsletter? We can have it mailed to your door ... etc ...

But it's so hard when money is all created by debt, to differentiate "real money" vs "debt money."

Even in fully redeemable gold backed currency, if you have fractional reserve banking, the bank notes or account balances created by the bank are indistinguishable from "real" gold coin money.

In libertarian banking circles, there has been a long debate as to whether 100% current account money is a present good or not. I used to think not, now I think it is (my logic is along the lines that if you park your car in a parking lot, it is still your car.)

All I'm saying is that this "what's debt what's money?" stuff is subtle in the best of circumstances and it leads us astray. The Fundamental Error the deflationists make, I think, is mistaking one for the other, even when they say they are not.

Steve Saville has pointed out that if you get a loan from the bank, and you buy an asset, even if that asset falls to zero value, the money you got from the bank is irrevocably in the economy stream of commerce. So a write-off of the asset's value is not deflationary. You bought the asset with money and that money was used by the asset seller to buy other stuff and nothing that happens with your asset affects the bank-created money (from your original loan) one way or another.

So even if there are massive loan defaults in the FIRE economy, that doesn't mean there will be any deflation.

And as is clear from the statistical evidence I have seen, Japan proves this point.

They went through "deflation" but really, they went through falling asset values and perhaps falling wages. The money supply only briefly dipped into negative territory all that time, and that dip was so small as to be potentially insignificant.

What seems certain to me is that in this credit cycle we are in, there will be massive defaults and writeoffs, but what is also clear to me is that there will continue to be massive monetary inflation through it all.

That makes precious metals a good way to protect assets without participating in the credit cycle. It's the only safe haven I can think of that is relatively portable and liquid.

[Lukester]

Bart -

Thank you for the input! I noticed you omitted the Italian Lira on the currencies chart though, one of the world's premier "anchor" currencies (so "anchor-like" it sank like a stone)?

That particular brand of fiat paper drifted down to approximately where the words "2004 using Euro" appear on your third chart. Poor old Galileo ...


http://www.itulip.com/forums/attachment.php?attachmentid=48&stc=1&d=1185120343

<CENTER> </CENTER>

[bart]

bart, how do you interpret armstrong's chart? i've found armstrong's stuff interesting, but when he revealed that the cycles relate to the value of pi i rolled my eyes. i had preferred to think they were either purely empirical or related to some economic cycle. anyway, i know the inflection points do not, supposedly, relate to any particular market, and may just be volatility markers, but i don't see anything in feb '07 that relates to the high peak in the graph. yes, there was a sell-off of a few percent in the equity markets. i also looked at the crb, gold, oil, yen, euros, tbonds. do you put any credence in armstrong, and if so how do you interpret it?


My best answer is that it's another tool in the arsenal I use for analysis and projection. I don't recall anything he wrote about it being related to pi - everything I've seen ( link (http://web.archive.org/web/20010407235154/http://armstrongdefensefund.org/martypei/buscycle.htm) ) indicates that the full cycle and its sub cycles were empirically derived. Do note that a half cycle aligns very well with the 4 year "business cycle" too.

As far as the Feb 2007 peak, it did indeed call the equity peak... and I think it's too early to make much of what has happened since then. I prefer to evaluate its accuracy and usefulness by observing how well it called a peak in 2000 and a bottom in 2002 as well as how meaningful most of the other dates are.

And from my forecast page:
...but it works for us to help put things into a broad perspective. Do also note that we're not trying to say that different markets hit peaks and valleys at the same time, just that the cycle helps identify probable major turning points in one or more markets.

[bart]

Bart -

Thank you for the input! I noticed you omitted the Italian Lira on the currencies chart though, one of the world's premier "anchor" currencies (so "anchor-like" it sank like a stone)?

That particular brand of fiat paper drifted down to approximately where the words "2004 using Euro" appear on your third chart. Poor old Galileo ...


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You get a rimshot (http://www.nowandfutures.com/grins/rimshot.mp3) for the Lira and how it has been an "anchor". :D

Keep in mind that it's not my chart too. It was done by the AEIR, and I think they played a bit fast and loose with the gold value... but the rest seems pretty close.

[bart]

But it's so hard when money is all created by debt, to differentiate "real money" vs "debt money."

Even in fully redeemable gold backed currency, if you have fractional reserve banking, the bank notes or account balances created by the bank are indistinguishable from "real" gold coin money.

In libertarian banking circles, there has been a long debate as to whether 100% current account money is a present good or not. I used to think not, now I think it is (my logic is along the lines that if you park your car in a parking lot, it is still your car.)

...




As EJ and others including myself have observed, it's all about the definitions being used.

The basic tool for the manipulation of reality is the manipulation of words. If you can control the meaning of words, you can control the people who must use the words.
-- Philip K. Dick

The bottom line basics for me in this area is that money is a medium of exchange, credit is a type or subclass of money, and inflation is more money than goods (plus its corollary deflation is less money than goods).

If money disappears, like the ~$6 trillion from stock markets from 2000-2002, relative deflation (or disinflation if you prefer) occurs. Credit disappearing in any manner reduces money.

[jk]

bart, from the very article you link to:

The total number of days within an 8.6-year business cycle was 3141. In reality, the 8.6-year cycle was equal to p (Pi) * 1000. Suddenly, there was clearly more at work than mere coincidence.

[bart]

bart, from the very article you link to:

The total number of days within an 8.6-year business cycle was 3141. In reality, the 8.6-year cycle was equal to p (Pi) * 1000. Suddenly, there was clearly more at work than mere coincidence.




I sure did miss that, thanks.

I still think it's inconsequential, especially in the context of it also having been partially a marketing piece and there being quite a number of folk who like and respond to that kind of stuff. I could probably link the cycles somehow to Fibonacci numbers too with a little slightly creative math, and also with the sunspot or even Wheeler's weather cycles.


The bottom line though is that it does work and has called many major turns throughout its history. That's the final test in my book.

[Mega]

But Honda and BMW HAVE factorys in the US!
Mega

[c1ue]

Here's another possibly interesting angle I have been considering re: US dollar:

Galbraith in his book about 1929 had a little paragraph about how a nation of middle class is much more stable than a nation of a few haves and a lot of have-nots.

The reason is that the middle class have a much larger proportion of their spending on essentials - that therefore their consumption is necessarily more consistent than haves, because the haves can change spending by orders of magnitude basely purely on desire.

If I look at the US vs. the rest of the world, what is interesting is that even with the purchasing power erosion of the US middle class, that this middle class would still be considered a 'have' in terms of most of the rest of the world.

Given this context, is it then possible for the US (middle class and upwards) to suddenly reduce its consumption a la the 'have's? Especially given the global nature of the goods and services consumed by the US?

The reasons for such a reduction could be easily extrapolated from the US 'have' behavior - i.e. typically the removal of wealth effect causing rich and nouveau riche to reduce spending by an order of magnitude or more.

How possible is this? I am looking further into this interesting idea principally by looking into the categories of consumer spending as collected by the US government.

My initial view is that this concept would almost certainly not apply to Food. (12.78%)

Housing it can be argued will be stable as lowering values would be offset by higher borrowing costs. (32.68%)

However, actual cost of shelter is 18.97%, plus 6.86% utilities. The remainder is furnishings, supplies, and 'household operations'.

Transportation is 17.98%, but half of this number is vehicle purchases (7.63%) - vs. gas+motor oil, other vehicle expenses, and public transport.

Remaining categories:

Alcohol 1.0%
Healthcare is 5.74%
Entertainment is 5.14%
Personal Care 1.17%
Reading 0.27%
Education 2.02%
Tobacco 0.68%
Miscellaneous 1.74%
Cash contributions 3.58%
Insurance + pensions 11.21%

Removing the portions associated with food, shelter, gas+motor oil, other vehicle expenses (repair + vanity), public transport, health care, personal care, education, and insurance+pensions yields a little under 33% of spending that could be reduced - across the entire population.

To give some scale, this paper profiles consumer spending trends from 1928 to 1933: http://www.econ.canterbury.ac.nz/personal_pages/les_oxley/pdf_files/greasley_madsen_oxley.pdf


TABLE 1
Consumer Spending: Lebergott/BEA ($ Billions, 1987 Prices)
Year Perishables Semidurables Durables Services Total
1928 164.3 59.9 38.4 269.6 532.3
1929 168.3 61.7 40.3 284.4 554.8
1930 164.8 56.1 30.9 269.0 520.8
1931 164.4 53.6 26.4 257.6 501.9
1932 154.1 46.9 20.0 236.0 456.9
1933 151.1 42.7 20.2 233.5 447.6

Perishables = food, alcohol, and tobacco
Semidurables = housing-supplies, housing-operations, parts of 'other vehicle expenses'
Services = Almost everything else except above 2 categories and excepting vehicle and furniture purchases
Durables = vehicle, furniture, kitchen appliances, china, other furniture purchases

You will note that Food saw an 8% drop from 1928 to 1933, durables dropped nearly 50%, semi-durables dropped almost 30%, and even the catch all services category - including health care, housing, gas+motor oil, education, and utilities dropped over 13%.

I think no one would argue against the 1928-1933 data as being an example of US national economic catastrophe!

[dauphiné]

European and Japanese leaders will respond with the only weapon they have left: monetary inflation. They’ll cut interest rates and buy dollars with their currencies, flooding the world with euros and yen the way the U.S. now floods the world with dollars. The result of these “competitive devaluations” will be a death spiral for all major fiat currencies, in which European or Japanese bonds will fare as badly as their U.S. cousins.These assertions overlook two facts I'd like to stress:

1) more than 80% of European Companies turnover is done in Europe i.e. costs and prices in euros - so "only" 20% of the business is exposed to the exchange rate dilemma. This is the main argument for an ECB policy not reacting immediately to the US Dollar drop. But it affects very high profile business like Airbus... strong symbolic & strategic implications.

Recall that the only reason Japan or Europe can generate even their current meager rates of growth is the willingness of U.S. consumers to buy their Hondas and BMWs. As the dollar plunges, Japanese and European goods, priced in suddenly-appreciating currencies, will become prohibitively expensive for U.S. consumers, who will respond by buying U.S.-made alternatives or nothing at all.2) US consumers might not revert on US made products instead of Japanese or European, but on Korean, Indian, Chinese, Vietnamese ; because the US industry is in such a bad shape after years of outsourcing... so will the US industry even be in position to grasp this "opportunity" ?

[jk]

c1ue, does "food" include restaurant expenditures?

[c1ue]

c1ue, does "food" include restaurant expenditures?

JK,

Good point - actually the Food category includes both Food(at home) and Food(away from home).

Breakdown is:

Food(overall) 12.78%
Food(at home) 7.10%
Food(away) 5.68%

Of course, Food(at home) also includes (other food) - a category which jumped 7.7% at the expense of most of the remaining Food(at home)categories (meat, eggs, dairy fell about 15% in 2005).

This jumps the 'discretionary' spending to 38%+.

The interesting note from the 1928 to 1933 data is that durables spending dropped first and fastest - not surprising, but services (including housing) had a fairly equal drop all the way until 1932-1933.

[FRED]

All I can say is, good thing the credit market risks are contained to low grade sub-prime residential real estate debt and only hitting ABS derivatives and not spreading to a completely separate market such as, say, the AAA grade debt used to finance commercial real estate. Uh, oh.

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