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EJ
06-21-08, 07:30 PM
http://itulip.com/images/gasmask.jpgYou're not going to believe this: Inflation/deflation debate still alive?

I was just CC'd on an email from my friend Rick Ackerman to his co-conspirator in deflation prognostication Mike (Mish) Shedlock. I don't know if Mike has given up yet on his now four year old "inflation is just around the corner" forecast, but it appears Rick hasn't. Here's what Rick had to say:
What is both unfamiliar and frightening about the inflation “story” is that it is unrelieved by even the dimmest prospect of higher wages. This is where the stagflationists' forecast of persistent but nonetheless tolerable sluggishness in the economy fails, since merely annoying, 1970s-style stagflation would be preferable to the deflationary noose that has been asphyxiating the economy. Indeed, while prices for nearly everything are continuing to rise, and quite steeply, incomes remain hopelessly stagnant. Were this to continue, do you think the endgame will be inflationary, or deflationary? If you have any doubts, here's a story from the Chicago Tribune that is likely to dispel them:


In weak economy, forgoing $4 lattes for home brews (http://www.chicagotribune.com/business/sns-ap-no-more-lattes,0,2129530.story)
June 19, 2008 (Chicago Tribune)

The "latte effect" of the go-go years had consumers spending $4 a day on coffee. Now the downturn is forcing them to rethink the wisdom of such habits.

As inflation squeezes budgets, middle-class Americans are taking fresh stock of their spending in search of ways to save a nickel or a dime. The result: People are giving up a variety of small financial vices.

For Michelle Hovis, that means refilling her husband's used soda container from a 2-liter bottle she buys on sale for 98 cents. She tweaked his daily habit of buying a 20-ounce bottle when the price crept up to $1.39.

"The price of gas, milk, eggs -- everything you can't control -- is going up. So you need to watch the things you can control," said Hovis, a 31-year-old stay-at-home mom from Iron Station, N.C.
Note that the article that is offered as evidence of impending deflation refers repeatedly to the inflation that we are not supposed to be having in the first place. Here is my reply.
Oh, geez. We’re not still beating this dead horse, are we? Where is it written that you cannot have an inflation spiral without wage inflation? Here’s the process as explained by a couple of bright guys over at the IMF writing about India's experience, depicted with this simple diagram. The inflation is launched by a disturbance in the exchange rate value of the currency. The depreciating currency then feeds into a self reinforcing process of money supply growth, inflation, price increases, and further pressure on the exchange rate value of the currency.


http://itulip.com/images/inflationexchangerate.gif


There were two exchange rate “Disturbances” in our case: the collapsing housing bubble and energy price shock. Both are ongoing.

We have experienced for years on end commodity price inflation driven by energy imports that exert out-sized influence on prices of everything that has energy as in input cost – that is to say, just about everything. Meanwhile, real wages have declined. If you don’t believe me, eat or drive or go to Paris for a weekend.

At the same time, we have experienced asset price deflation, especially in RRE and soon in CRE. Many banks are technically insolvent, although they don't know it yet, soon to be zombies ala Japan 1995 supported by government but without explicit nationalization.

Both inflationary and deflationary forces are always at work in any economy. Clearly, they are netting out to inflation today. Yet by the standard deflationista's theory, the commodity price inflation will reverse with falling demand and without wage inflation commodity price deflation will commence, any day now. I have never been able to see the logic of this argument. The US has experienced inflation for years without wage inflation. Why will wage inflation be a prerequisite for future inflation if it has not been for years on end in the past?

Tell it to the Argentines

The primary source of our inflation for the past few years, dollar depreciation, doesn’t go away just because demand is falling and GDP is negative as the economy shrinks and folks shift from lattes to home brewed coffee. Usually it does, but not this time.


http://itulip.com/images/AveDurationUnemp1960-2008.gif


Data point: when average duration of unemployment reaches a post recession peak of 40 weeks, typical since 1960 (now it’s zero), inflation peaks about six months previously. By this measure we have a long way to go. The Fed could raise interest rates and throw the US into a deep recession, but it's not clear that such a move will not simply cause the dollar to fall even more, as exchange rates are now as much determined by relative economic performance among nations as by relative interest rates and inflation. One way or another, average duration of unemployment will eventually rise to 40 weeks.

What's "different this time" for the USA is the same old, same old for all indebted nations with huge external liabilities throughout history. Take Argentina 1988 to 1991, for example.

As we explained to our readers last year, we are on a version of the curve shown in the graphs below that show the Argentine inflation and recession of the late 1980s. Not as extreme because we don’t have the levels of short term debt that the Argentines had and, of course, the dollar is a reserve currency unlike their peso. Our peso is better than their peso, but it’s still a peso – here at iTulip we call it the bonar. Still, we are on a similar curve. This is what happens when you are in debt and your government chooses to externalize its problems via currency depreciation.


http://itulip.com/images/argentinaGDPinflation.gif


Note that the first rise in inflation in 1985 settles back down again before the moon shot in 1989. We are not talking about a predictable, linear process here. In fact that inflation was an higher amplitude version of the 1976 inflation.

Let’s zero in on the main event, from 1988 to 1991. Note that GDP in dollars declined 35% during the period in 1989 when inflation exploded to over 3000%. Yet GDP in pesos remained relatively flat. Sound familiar? Here in the US by a measure of GDP in dollars we’re still not in a “recession.” US GDP as measured in euros or gold, we’ve been in recession since Q4 2007, as we forecast at the end of 2006.

Back to Argentina. What were wages doing in pesos during the period? Can't have an inflation spiral without wage inflation, right? Wages were falling in dollars, of course, much as US wages have been falling in gold, silver, oil, and euros here for the past few years; that’s our currency standard today compared to an Argentine peso holder’s US dollar in 1989.


http://itulip.com/images/argentinaGDPinflation2.gif


The Argentine inflation didn’t end until the peso was tied to the US dollar in 1991. The bonar inflation will end when the bonar is tied to a new currency, now in the early stages of negotiation with the Chinese et al, according to our sources. Looks like the IMF may have a new role after all.

The US version may go something like this. From our 2005 hypothesis of a 100% US inflation over six years Inflation is Dead! Long Live Inflation! (http://www.itulip.com/forums/showthread.php?p=2080#post2080)


http://www.itulip.com/images/janszen_4-26a.JPG
Our 2005 analysis says home prices likely do not rise as shown,
as asset price deflation follows asset price inflation.


So not 3000% inflation as in Argentina but a more modest 30% or so peak year. Sound far fetched? It sure did in 2005. Question is, is the theory sounding more or less reasonable as the years go by, or should we three years later still be holding our breath waiting for the commodity price deflation to arrive?

See also:
Inflation unlikely to ease, economists say (http://www.ndtv.com/convergence/ndtv/story.aspx?id=BUSEN20080053838)
Indians fear repeat of 1990s as inflation soars (http://afp.google.com/article/ALeqM5hCl7FL4Gvb3xmqhgcxxY7AfA2sVw)
What's so wrong with big wage rises anyhow? (http://www.sundayherald.com/oped/opinion/display.var.2356746.0.0.php)
Gold may rise to $5,000 on inflation, Schroder says (http://www.bloomberg.com/apps/news?pid=20601012&sid=aF1439PVhAgk&refer=commodities)
The debate continued the next day:

Rick and EJ continue the discussion, below.


Rick: Better you should ask how the yen performed relative to all other classes of yen assets. Answer: Just fine. Gold in fact has always done relatively well as an investable (sic) during deflationary times. Still, as a hard-core deflationist, I have my doubts that the POG will get to Sinclair’s promised land above $5000 oz.The yen performed well because the yen is not a reserve currency, the Japanese experienced a hyperinflation after the war, and so protecting the yen was more important than preventing deflation. In contrast, the Fed is throwing the dollar under the bus to prevent deflation. It works – too well.

Please take another look at the Argentina example. The relationship between the dollar and gold now for the US is similar to the relationship between the peso and the dollar for Argentina in the late 1980s. Deflation in domestic peso terms, yes, inflation in dollar terms, yes also. Asset prices are falling in dollar terms but crashing in euro terms.


http://www.itulip.com/images/dowineurosJan2007-Jun2008.gif


Not only US stocks but US real estate is cheap if you are a European.

Wage rates increased in Argentina during their 1988 - 1991 inflation but an American company could buy labor in Argentina for pennies on the dollar. Today US wage rates are 50% lower in euro terms than a few years ago -- great if you are a European company paying employees in the US. US wages are deflating against commodities priced in dollars, and domestic commodity prices, to the extent that these are determined by imports, are continuing to inflate.

Oil not gold is the ultimate money as it is the critical input to everything else. As Peak Cheap Oil arrives, everything is deflating against oil, which we experience as commodity price inflation. This event is widely misunderstood as a demand shock. Oil demand in OECD nations has declined to 2% annual growth rates since 2004 as oil prices doubled then doubled again. As China and oil producers are starting to reduce subsidies, demand may fall some more, but we'll see how long the oil kelptocracies and Chinese state continues with that program -- government give-aways are all they have to maintain political legitimacy. Meanwhile, oil producers have demonstrated that they intend to keep more of the oil they have left in the ground, so in spite of politically motivated assertions to the contrary they are not increasing supply but cutting it faster than demand is falling.


Rick: But I have no qualms about assuring my subscribers that gold is all but certain to hold its purchasing power – not only relative to all other classes of assets, but relative to anything that you would care to call money. Gold is an international currency. As governments print to reflate economies, the value of national currencies deflate against gold.

My theory since 2001 is that this process will eventually take gold to $2500. Needless to say, that was contrarian back when gold was trading at $270. At $900 we have new entrants with very deep pockets to take us to the next stage of the market:
"Gold prices may rise to $5,000 an ounce (http://www.bloomberg.com/apps/news?pid=20601081&sid=aF1439PVhAgk&refer=australia) as investors seek to protect themselves against accelerating inflation, said Schroder Investment Management Ltd., which oversees $277 billion of assets globally."
If funds keep throwing billions at the gold market, and CBs become net buyers as Schroder expects, who knows – maybe we'll get to $5000. The paradox is that the guys who created this mess are the same guys who are now struggling to maintain the purchasing power of all the money they made on it. The rest of us are collateral damage.


Rick: Even more certain is that, on a day in the not-too-distant future, Americans will realize that the hundred dollar bills they carry in their wallets are fundamentally and intrinsically worth no more or less than the $1 bills. I can’t tell from your writing whether you understand this, but if you do, it should disabuse you of the notion that the economy is somehow going to continue to muddle along. Muddling is one thing we deflationists all strongly agree cannot continue for much longer.I have no allusions that the US economy can muddle along. For a quick summary of my positions, I recommend:
USA, Inc. Common Shares: Long or Short? (http://www.itulip.com/forums/showthread.php?p=7131#post7131)

A Financial Market Crash is a Process, Not an Event (http://www.itulip.com/forums/showthread.php?p=13997#post13997)

The Myth of the Slow Crash (http://www.itulip.com/forums/showthread.php?p=15103#post15103)

Rick: Concerning deflation and its symptoms, there is little I would care to add to the story I linked from the Chicago Tribune (which you have yet to acknowledge and presumably did not bother to read). When middle-class America cuts out lattes and starts refilling soda-pop containers, that is not inflation, or stagflation, or hyperinflation; it is a small step toward Depression, when almost nothing pleasurable, or that we currently take for granted, will be affordable.I did read it. Substitution always occurs during inflations. See:
Inflation in America - Part I: Five signs of inflation (http://www.itulip.com/forums/showthread.php?p=34140#post34140)
This will go on and on for years and years as living standards decline. Inflation is easier for people to adjust to than you'd think, certainly easier than 25% unemployment and no money around to buy anything, as was the policy choice in the 1930s as wealth holders pressured the State to stick to the gold standard which tied the Fed's hands to create inflation. As soon as the US went off the gold standard in 1933 and gold was re-priced, an instantaneous spike in inflation from -10% (deflation) to +15% (inflation) resulted.


http://www.itulip.com/images/USdeflation.png


This inflation occurred after thousands of banks failed and the banking system had basically cratered. Those who hold fast to the theory that we are going to see commodity and wage price deflation as an outcome of this credit bubble don't seem to understand this part of the history of the last US credit bubble.

By the way, the gasoline sign using to illustrate the Five Signs of Inflation piece was created using a web tool atom.smasher.org. Actual gas prices at the time in April were around $3.50 for regular and few believed that regular gas was going to rise of over $4. Now the sign looks like what you see everywhere. Soon those prices will look quaint.


Rick: Like Mish, I’m not looking for an argument -- I simply don’t have the time. If I'd been forecasting deflation for years on end and a google news search produced 136 times as many results for a search on "inflation" versus "deflation" (142,539 search results vs 1,043 search results), I'd be looking to make some adjustments in my model.

The only major adjustment that I've had to make is my forecast is on long term interest rates. I expected they'd have turned up by now, given the high levels of inflation. A friend who is a hedge fund manager running $1B told me in March he was finally taking huge short positions in long treasuries. He moved into the 10 yr at 3.34% and now it's at 4:16%. Good move. Will yields continue up and prices down?

Here's a surprising voice added to the inflation chorus: (http://www.forbes.com/markets/2008/05/30/consumer-confidence-update-markets-econ-cx_md_0530markets20.html)

When asked about the potential for stagflation, a combination of weak growth and high inflation, Greenspan said, "Oh certainly."

Greenspan also said, contrary to the opinion of many, that there isn't a commodities bubble building. "Once you get inflation pressure starting to emerge, you don't get bubbles." he said. (Forbes, May 2008)
I'm sure Bernanke wasn't too happy about that pronouncement.

But I would be grateful if you would provide me with a bullet-point synopsis of the major economic events that you expect to occur over the next 7-10 years. That will be the easiest way for me to determine whether I may have misunderestood you. Do we perhaps envision the same endgame -- an economy in smouldering ruins, credit markets wrecked for at least a generation, widespread poverty and unemployment to match or exceed the Great Depression, and the U.S. having to rebuild its manufacturing capacity almost from scratch in order to make an honest living in the global marketplace? If that’s “stagflation,” or hyperinflation, then you needn’t bother to respond.

iTulip's consistent record forecasting inflation 2005 - 2008:

Inflation is Dead! Long Live Inflation! (http://www.itulip.com/forums/showthread.php?p=2080#post2080)
No Deflation! Disinflation then Lots of Inflation (http://www.itulip.com/forums/showthread.php?p=2795#post2795)
Door Number Two: No hyperinflation but high inflation (http://www.itulip.com/forums/showthread.php?p=26304#post26304)
The deflation case: caught, gutted, poached and eaten (http://www.itulip.com/forums/showthread.php?p=28835#post28835)
You're not going to believe this: Inflation/deflation debate still alive? (http://www.itulip.com/forums/showthread.php?p=38853#post38853) I'm writing a book for Penguin (http://articles.latimes.com/2008/mar/26/entertainment/et-bizbooks26) that explains a tough transition period. We took a wrong turn in the 1970s. Now we have to go back and fix it.

The thesis of the book may help you understand where I'm coming from:

Working title: The New New Deal, Re-industrialization of Post Depression America

The recession that the US is entering in the early part of 2008 is not a typical business cycle recession or even a post bubble recession as occurred in 2001. The collapse of the housing bubble and the energy price shock are the triggers that started a process of major structural change in the US and World economy. When the transition is over in a decade, the US economy will hardly resemble its current form:


Dependence on foreign borrowing to finance consumption and operate the government will end and reverse
Dominance of the Finance, Insurance and Real Estate (FIRE) sectors of the economy for economic growth will give way to new productive industries in transportation, energy, and communications
Trade deficits that started in the early 1980s will reverse and the US will begin to run a trade surplus
Burden of economic rent extraction in the form of interest on public and Private sector debt will be lifted via a combination of inflation, restructuring, and debt cancellation
Low national and household savings rates will rise to 1960s levels
Consumption will decline by half, from 70% of GDP today to 50% of GDP
Energy intensity, the amount of energy needed to produce a dollar of GDP growth will decline by half, led by conservation initiatives

The US will experience the transition as a series of recessions which,
cumulatively, may be as severe as in The Great Depression, but inflationary versus deflationary. We are seeing the first of these now.

The New New Deal asks and answers:

How did we get into this mess?


Why have US financial markets been in turmoil for over a year?
Why has the dollar weakened over 40% since 2002?
Why is inflation rising?
Why is unemployment rising?
Why are asset prices falling?

How are we going to get resolve our crises?

My publisher doesn't want me sharing the solutions part of the book, but basically the idea is that unlike the old New Deal, this time we unleash markets on the problem, with equity versus debt based financing.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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phirang
06-21-08, 08:13 PM
Tying the bonar with the Yuan... wouldn't that annihilate China's exports? I don't see how a new currency would change anything: there can be only one winner in this game, and China, with the trade surplus, has time on her hands. China is the world's largest gold exporter, and so perhaps China can attack the gold market to push money back into USD.

As for wage-push inflation impact, I don't see how inflation can get much worse if wages do NOT increase AND there's a sustained decrease in aggregate demand UNLESS we maintain massive deficits AND/OR lose seignorage. Iraq plays into this as a potential weakness in our USD oil currency, which is the crux of our purchasing power. More analysis on the vulnerability of the USD as the currency for oil is needed.

If the US gov reduces its deficit and manages to maintain seignorage, then speculative and compulsory demand for USD will maintain or increase. The question is: will the US gov manage to reduce the deficit and NPV of liabilities(Obama has a decent tax plan for that, to his credit) without creating putrcry for deficit spending to jumpstart the economy?

Also, can we maintain the imperial circle? Say we do have deficit spending: does it matter? Having traveled a bit, I can say with confidence that most countries are far worse places to invest than the US: economics being a confidence game, will the new hot money flowing into New Deal 2.0 manage to also persuade speculators to hold treasuries?

jk
06-21-08, 08:57 PM
wages ARE going up. just not here. global analyses?]

phirang
06-21-08, 09:09 PM
wages ARE going up. just not here. global analyses?]

but are those wage increases increasingly financed from ever decreasing trade surpluses as subsidy-driven industries grind to a halt?

metalman
06-21-08, 09:28 PM
wages ARE going up. just not here. global analyses?]

wages going up in china means rising prices of china imports in the usa.

phirang
06-21-08, 09:32 PM
I posted a comment by some executive at Nippon steel mentioning how he could no longer pass on the costs to his customers of the price-hikes from his suppliers... I think it's a good indicator that we're hitting a production wall.

bart
06-21-08, 11:58 PM
How droll that some are still chanting deflation... although hourly average wages certainly have been deflating.
In one of those sad surprises to most, they actually peaked in early 1973 whether using CPI or the more real shadowstats data.

http://www.nowandfutures.com/images/hourly_earnings_cpi_lies1964-current.png


Per Fortune magazine in 1999, the average annual individual salary in the US went from $32,522 in 1970 to $35,864 in 1999. Both numbers are expressed in 1998 dollars (in other words, corrected for CPI measured inflation as of 1998). I don't know their data source but suspect it could be yearly IRS data - anybody know?

ocelotl
06-22-08, 12:57 AM
How droll that some are still chanting deflation... although hourly average wages certainly have been deflating.
In one of those sad surprises to most, they actually peaked in early 1973 whether using CPI or the more real shadowstats data.

http://www.nowandfutures.com/images/hourly_earnings_cpi_lies1964-current.png


Per Fortune magazine in 1999, the average annual individual salary in the US went from $32,522 in 1970 to $35,864 in 1999. Both numbers are expressed in 1998 dollars (in other words, corrected for CPI measured inflation as of 1998). I don't know their data source but suspect it could be yearly IRS data - anybody know?


I find it quite informative the graph that you post above, Bart. It reminded me to a table of data referring to the evolution of the minimum wage here in Mexico. As measured per Mexican CPI data, in real terms it was at the highest level in 1976, after a decree on the final period year by Luis Echeverría. We see that the bulk of the afterwards deterioration was during the rampant inflation period, namely between 1976 and 1988, and that later governments until 2000 maintained a loss in Minimum wage deterioration, being, numerically and in real terms, the Vicente Fox period the first one that ended with a minimal loss of minimum wage in real terms.

Table can be found, with related explanation in spanish from Manuel Aguirre Botello, the author of it, HERE (http://www.mexicomaxico.org/Voto/SalMinInf.htm)

Why is the minimum wage so important in Mexican Economy?

Before the rampant inflation period, tariffs and fines were set on a base level, and corrected (if applicable) every now and then according to decrees. At the early 80's since it got too difficult to be legislating constantly the new tariffs, which were eaten alive by inflation before being implemented, the idea was to link them to a base price that anyway had to be modified as pertaining by mexican legislators. The most widespreadly used price tag that has always been subject to decreed increases is the daily minimum wage.

Other issue is that there are three numbers nationwide for the Minimum Wage in Mexico.



Souces: Wikipedia (http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country) and Mexican SAT Minumum Wage page
(http://www.sat.gob.mx/sitio_internet/asistencia_contribuyente/informacion_frecuente/salarios_minimos/default.asp)
Daily minimum wages set anually by law and determined by zone; 52.59 Mexican pesos (http://en.wikipedia.org/wiki/Mexican_peso) in Zona A (Baja California (http://en.wikipedia.org/wiki/Baja_California), Federal District (http://en.wikipedia.org/wiki/Federal_District), State of Mexico (http://en.wikipedia.org/wiki/State_of_Mexico), and large cities), 50.56 pesos in Zone B (Sonora (http://en.wikipedia.org/wiki/Sonora), Nuevo León (http://en.wikipedia.org/wiki/Nuevo_Le%C3%B3n), Tamaulipas (http://en.wikipedia.org/wiki/Tamaulipas), Veracruz (http://en.wikipedia.org/wiki/Veracruz), and Jalisco (http://en.wikipedia.org/wiki/Jalisco)), and 49.50 pesos in Zone C (all other states)Just to set another example where inflation turned rampant with an inflation in wages that kept losing in real terms and has not "catched" price inflation until both were leveled to a single digit.

donalds
06-22-08, 02:01 PM
So the US has been experiencing wage deflation for many, many years (with debt substituting for income). Yet one is lead to believe that price inflation (at least as far as some goods/services are concerned) will continue to rise even though deflation of wages remains. As for global wage deflation (commonly called cheap labor), rising wages are expected (assuming that job growth continues rather than reverses: rising unemployment due to global economic recession - or at least a significant slowdown), resulting in exporting inflation. In any case, wage increases in so-called emerging markets would have to be rather significant to overcome and exceed the current and still deflated wages in places like India, China, Vietnam, etc., to the point where one can say that wages in said countries have rise to such an extent that those wages can no longer be considered cheap.

As for energy, there too we are seeing rising costs, costs which still have a distance to go to account for 'true' costs: externalities, especially the looting of nature. This is especially obvious in the US where gas is cheap, but elsewhere too where the environmental costs have been displaced from the US to other countries (i.e. think air pollution in China, which of course makes it's way to California). So . . . the cost of energy is still got a ways to go to move from what one would think of as deflated to inflated, though the trend is moving in that direction (for which we can be grateful for).

Costs for woman's clothing, SUVs and trucks, houses, toys, electronics, etc., are still in the state of deflated prices, either reflecting overproduction (glut) or cheap labor. Of course rising costs has taken hold for food and energy, which is no less a a global matter, just as deflation imported to the US from China (still happening, even if prices are going up - again, closing that gap between deflated and inflated still has a ways to go, and a significant one at that). So, one would expect that price increases in some sectors will continue for the foreseeable future (whatever the hell that means). Likewise, deflated wage costs in areas mentioned above can be expected to continue . . . for the foreseeable future.

As for Argentina . . . bad, bad example. As expected, the confusion here lies in turning cause and effect upside down. Many factors were at play in Argentina, which reflect a complexity that attributing inflation to currency-centric depreciation fails to take into account. The world is not so simple. The failure of the Argentina economy can be attributed to many factors, but that regarding currency is symptomatic. The same can be said about inflation in Argentina. Social, domestic/political, geo-political/global and other factors were entangled in Argentina, the result of which lead to inflation and a currency crash, not the other way around.

http://www.newleftreview.org/?view=2410

jk
06-22-08, 02:54 PM
but are those wage increases increasingly financed from ever decreasing trade surpluses as subsidy-driven industries grind to a halt?
i think you raise the key question: whither chinese incomes? or, perhaps, wither chinese incomes? this in turn leads to: what will china do as the u.s. consumer economy goes into reverse? i would imagine that unemployment and food availability/affordability are the highest concerns of the chinese leadership. as exports to the oecd slow, how will the chinese react? they just bumped up the domestic oil/energy price, reducing subsidies, and presumably ratcheting down demand, while attacking domestic inflation. the schiff scenario is that they allow their currency to appreciate, so that the cost of globally traded goods like food and fuel is reduced, thus solving their inflation problem. this only works, however, if they can shift their economy toward domestic consumption. it is hard to see how they could quickly make such an adjustment, but the alternative is mass unemployment and social instability.

don
06-22-08, 03:10 PM
I felt from the beginning that playing the military adventure card was to prop up the bonar, not seize the oil wells per se. The super-sized bases in-country, the deep water berthing and airbases in the Gulf, are all about just that. Playing the khaki card against Iran will be bonar decision-driven as well. The question is, does it still work and what are the fiscal implications in doing so. A major component in the inflation question, and one that separates the big boys from the Argentinians.

FRED
06-22-08, 03:12 PM
As for Argentina . . . bad, bad example. As expected, the confusion here lies in turning cause and effect upside down. Many factors were at play in Argentina, which reflect a complexity that attributing inflation to currency-centric depreciation fails to take into account. The world is not so simple. The failure of the Argentina economy can be attributed to many factors, but that regarding currency is symptomatic. The same can be said about inflation in Argentina. Social, domestic/political, geo-political/global and other factors were entangled in Argentina, the result of which lead to inflation and a currency crash, not the other way around.

http://www.newleftreview.org/?view=2410

This is why Argentina is a good example. Read the article again. We don't say that the peso exchange rate is the cause of Argentina's economic problems but an expression of them. The inflation is related to depreciation in the US in a similar, albeit, different way than it was in Argentina.

Social, domestic/political, geo-political/global and other factors are entangled in the US, the result of which is leading to inflation and a "currency crisis," to use Paul Volcker's term. In our case:

Dependence on foreign borrowing to finance consumption and operate the government
Dominance on the Finance, Insurance and Real Estate (FIRE) sectors of the economy for economic growth
Burden of economic rent extraction in the form of public and private sector debt
Low national and household savings rates
Dependence on domestic consumption for 70% of GDP
Persistent trade deficits
High energy intensity, the amount of energy needed to produce a dollar of GDP growth
Dependence on energy imports

These inevitably express themselves as currency weakness and inflation. There are many differences in the US vs Argentina cases, of course. If Argentina ran its economy as the US has since 2001 the peso would again be in crisis. The US has a privileged position, but is losing it.

donalds
06-22-08, 05:11 PM
Fred, you say:

"We don't say that the peso exchange rate is the cause of Argentina's economic problems but an expression of them."

You also write:
"Social, domestic/political, geo-political/global and other factors are entangled in the US, the result of which is leading to inflation and a "currency crisis," to use Paul Volcker's term."

E.J. says above:
"The inflation is launched by a disturbance in the exchange rate value of the currency."

So . . . taken together, inflation results from currency "disturbance" which itself is the result of (using Argentina as an example applicable to the US) "economic problems."

So, we are in agreement: inflation and currency "disturbances" are the result of social, political and macro economic developments. In addition, it should be understood (and I think it is) that inflation/currency movements and their consequences are the result of global developments, that is, should be understood in a global context.

My point is this: taking all of the above into consideration, would it not be analytically more accurate to argue one's case relying on an analysis of social, political and macro economic factors? Granted, such an analysis is often touched upon in iTulip. But does not too much attention to inflation/currency (recognized as symptom not cause) serve to conceal the more significant factors at play? Recognizing that currency movements and rising or declining prices is simply the outcome of larger developments, why not focus on these developments, and then relating them back to price/currency movements . . . rather than the reverse?

Understanding price/currency movements - admittedly crucial to one's understanding - should serve to flesh out these larger developments. My point is that too much focus - getting caught up in these movements - can result in failure to flesh out more important and substantial developments, with the misfortune of leaving the subject matter unduly concealed in what can amount to a fetish, where movements of prices/currency exchange can seem to take on a life of its own, and thus by weight of argument be confused as the casual agent rather than the consequence. Doing so results in the failure to accurately address the inflation/deflation debate.

Aside: I am part owner of a farm in far southeast S. Dakota and in contact with residents in Iowa. The consequences for food prices due to the recent flooding in the midwest and especially in Iowa is loaded with uncertainties. But I think it safe to say that those consequences will be much more significant in the relative near future than they may now appear.

phirang
06-22-08, 05:25 PM
a chat I had with an econ friend of mine who's at MIT:


" inflationary spiral .. that's the key thing to control here ... i mean all you need is sufficient consumption curtailings to induce that to not happen -- could include maintaining low wages among other things ... the oil shocks i think as they run their course will induce this anyway .. im not concerned about an inflationary spiral. .. this is cuz the oil shocks .. ppl tend to misread it as an increase in the price of a huge component of our consumption bundle. the better way to understand it is like an adverse productivity shock -- it makes us less cost effective in production in all industries because its like increasing the marginal cost everywhere. "

grapejelly
06-22-08, 06:16 PM
I think the two big mistakes that people make is to judge inflation by wage prices, and to fail to understand the debt default is not deflationary.

First, Rick and Mish do not understand that inflation is created by borrowing money. That is how money is created. Through borrowing. Inflation happens when people borrow at a rate that exceeds the rate of economic growth.

Second, folks like Rick and Mish believe deflation happens through defaulted loans. Their argument is that widespread defaults lead to deflation.

But when loans are written off through default, there is no deflation because the money that was borrowed into existence was already spent and remains in the economy.

Only paying back loans results in deflation, because only paying a loan back removes that money from the economy. Paying back loans is flipside of inflation. Defaults are not the flipside of inflation. You can have widespread defaults and still have high inflation, but you cannot have people paying back their loans without a falling money supply and deflation.

*T*
06-22-08, 06:29 PM
Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To know that for destruction ice
Is also great
And would suffice.

Robert Frost

brucec42
06-22-08, 07:02 PM
Has anyone else noticed that 99% of the threads on iTulip die a quick death? Wonder why?

I suggest posters concentrate more on getting a central point accross, rather than on apparently attempting to wow us with their depth of knowledge, which I'm sure is extensive. We get it, you are bonafide.

I'm reading a lot of posts here that go on and on w/o really saying anything or bothering to sum up their point. That point can get lost in the details and long, complex, often run-on sentences being used. Some of us have jobs and other interests and can't devote 5 minutes of parsing your post to get to the point.

For example. My rubuttal to one post on Argentina would be relatively short and sweet.

"Prices rising for wages and goods don't cause inflation. Inflation causes prices to rise." W/O even reading much about it, I'm guessing Argentina's government printed too much money. Am I close?

Or

"The reason we masses had cash for $4 cups of coffee and $3,000 TV sets was that it was all borrowed or printed money. Those days are over. Get used to it. It was never real." Prices of stuff we don't really need (McMansions, fancy coffee, personal services, etc) will fall while prices of stuff we do need (food, energy) will rise.

I realize economics is complex. "makes Mongo's head hurt". But to expect any sizeable number of people to read what is basically a PhD thesis in every post is asking a lot.

I'm guilty also, I run on in my posts as well. But simply thinking of a simple way to say something instead of using the most words possible is a good start.

jk
06-22-08, 08:04 PM
But when loans are written off through default, there is no deflation because the money that was borrowed into existence was already spent and remains in the economy.

but the note was near-money. when i own a tbill, e.g., i think i'm holding money, even though i'm just holding a note. when loans are written off through default, the holders of those formerly valuable loans feel much poorer.

CanuckinTX
06-22-08, 09:13 PM
I'll second that Bruce.

Even though I have a degree in Economics and MBA in Finance I feel pretty stupid some days trying to figure out what the heck some people are trying to say. :)

metalman
06-22-08, 10:39 PM
Has anyone else noticed that 99% of the threads on iTulip die a quick death? Wonder why?

I suggest posters concentrate more on getting a central point accross, rather than on apparently attempting to wow us with their depth of knowledge, which I'm sure is extensive. We get it, you are bonafide.

I'm reading a lot of posts here that go on and on w/o really saying anything or bothering to sum up their point. That point can get lost in the details and long, complex, often run-on sentences being used. Some of us have jobs and other interests and can't devote 5 minutes of parsing your post to get to the point.

For example. My rubuttal to one post on Argentina would be relatively short and sweet.

"Prices rising for wages and goods don't cause inflation. Inflation causes prices to rise." W/O even reading much about it, I'm guessing Argentina's government printed too much money. Am I close?

Or

"The reason we masses had cash for $4 cups of coffee and $3,000 TV sets was that it was all borrowed or printed money. Those days are over. Get used to it. It was never real." Prices of stuff we don't really need (McMansions, fancy coffee, personal services, etc) will fall while prices of stuff we do need (food, energy) will rise.

I realize economics is complex. "makes Mongo's head hurt". But to expect any sizeable number of people to read what is basically a PhD thesis in every post is asking a lot.

I'm guilty also, I run on in my posts as well. But simply thinking of a simple way to say something instead of using the most words possible is a good start.

what did the man say, 'sorry for the long letter, if i had more time i'd have written a shorter one".

i can live with anything here. the topics we tackle here are ambitious even for trained economists. some folks need a lot of words to say a little others can say it in a few... we all started from different places and we're all in different places. sometimes we don't have time to write a short post. that means the reader has to do more work. you get back what you put in, is your point, and it's a good one.

ocelotl
06-23-08, 12:30 AM
I've been pondering points on actual situation worldwide, and referring it to late 70's and early 80's, and how it all worked down here in Mexico. What bugs me the most is the possibility of bank bailing by nationalization.

On September 1st, 1982, at the final Government yearly inform of López Portillo (http://en.wikipedia.org/wiki/Jos%C3%A9_L%C3%B3pez_Portillo), he cried while he was pondering the critical situation that the administration of his predecessor, Luis Echeverría (http://en.wikipedia.org/wiki/Luis_Echeverr%C3%ADa), and his own, put Mexico on. At the end of his speech, after trying to convince the public he was acting patriotically, he decreed to nationalize all private banks in Mexico.

What did the privatization of banks in Mexico brought to Mexican Economy?

First of all we have to remember that 1150 companies of all kinds of business were owned by Mexican Government by the year 1982.

As we have seen first hand, when a company is owned by a Government, there is no clear progress and development incentive due fundamentally, that as the owner, the government will keep supporting it no matter what their income is, and will use it on contracts since there is not the need to bid for them.

This lack of incentives makes any company to become ostracized, bureaucratic on both its internal management and work methods, and that bureaucratization is precisely what prevents innovation and modernization.

When a national government obtains monopoly not only in the money generation business, but also in the internal handling of it (Via the FIRE Economy) all kind of distortions regarding the growth of economy prevail. There is not a clear incentive to control money creation, since all of it is managed by the government, therefore, destroying confidence on the soundness of the policies under which money is managed. International investment flows away, and the government goes bankrupt. That is precisely what happened on Mexico between 1971 and 1982.

After the nationalization of Mexican banking system, no bank or country in the world lent any money for 26 months to Mexico. Most of the credit line opening as after those 26 months were not because of improvements on internal monetary policies, but due to the needs generated by the reconstruction of national infrastructure that had to be done after the September 19th 1985 8.1 Richter Earthquake.

How can US government support a nationalizing of the FIRE Economy? Could it stand for an extended period without external financing of deficit? If the internal monetary policies keep as they are, Would US bonar survive a loss of confidence from the rest of the World?

phirang
06-23-08, 08:35 AM
I've been pondering points on actual situation worldwide, and referring it to late 70's and early 80's, and how it all worked down here in Mexico. What bugs me the most is the possibility of bank bailing by nationalization.

On September 1st, 1982, at the final Government yearly inform of López Portillo (http://en.wikipedia.org/wiki/Jos%C3%A9_L%C3%B3pez_Portillo), he cried while he was pondering the critical situation that the administration of his predecessor, Luis Echeverría (http://en.wikipedia.org/wiki/Luis_Echeverr%C3%ADa), and his own, put Mexico on. At the end of his speech, after trying to convince the public he was acting patriotically, he decreed to nationalize all private banks in Mexico.

What did the privatization of banks in Mexico brought to Mexican Economy?

First of all we have to remember that 1150 companies of all kinds of business were owned by Mexican Government by the year 1982.

As we have seen first hand, when a company is owned by a Government, there is no clear progress and development incentive due fundamentally, that as the owner, the government will keep supporting it no matter what their income is, and will use it on contracts since there is not the need to bid for them.

This lack of incentives makes any company to become ostracized, bureaucratic on both its internal management and work methods, and that bureaucratization is precisely what prevents innovation and modernization.

When a national government obtains monopoly not only in the money generation business, but also in the internal handling of it (Via the FIRE Economy) all kind of distortions regarding the growth of economy prevail. There is not a clear incentive to control money creation, since all of it is managed by the government, therefore, destroying confidence on the soundness of the policies under which money is managed. International investment flows away, and the government goes bankrupt. That is precisely what happened on Mexico between 1971 and 1982.

After the nationalization of Mexican banking system, no bank or country in the world lent any money for 26 months to Mexico. Most of the credit line opening as after those 26 months were not because of improvements on internal monetary policies, but due to the needs generated by the reconstruction of national infrastructure that had to be done after the September 19th 1985 8.1 Richter Earthquake.

How can US government support a nationalizing of the FIRE Economy? Could it stand for an extended period without external financing of deficit? If the internal monetary policies keep as they are, Would US bonar survive a loss of confidence from the rest of the World?

SHort answer: no.

Long answer: the US has a lot of very desirable intellectual property and strategic assets that it can cannabilized to survive in the short-term, but the Empire is gone and, in the long-run, the USD.:D

Charles Mackay
06-23-08, 11:42 AM
In keeping with the spirit of Bruce's msg, I'll keep mine pithy.

Monetary inflation occurring simultaneously with credit deflation will continue for some time... probably until some black swan event. Best investment stance is to build your own personal hedge fund to be long gold and natural resources and short the credit bubbles like real estate, finance, and maybe the bond market. ;)

bart
06-23-08, 03:05 PM
I find it quite informative the graph that you post above, Bart. It reminded me to a table of data referring to the evolution of the minimum wage here in Mexico. As measured per Mexican CPI data, in real terms it was at the highest level in 1976, after a decree on the final period year by Luis Echeverría. We see that the bulk of the afterwards deterioration was during the rampant inflation period, namely between 1976 and 1988, and that later governments until 2000 maintained a loss in Minimum wage deterioration, being, numerically and in real terms, the Vicente Fox period the first one that ended with a minimal loss of minimum wage in real terms.

Table can be found, with related explanation in spanish from Manuel Aguirre Botello, the author of it, HERE (http://www.mexicomaxico.org/Voto/SalMinInf.htm)

Why is the minimum wage so important in Mexican Economy?

Before the rampant inflation period, tariffs and fines were set on a base level, and corrected (if applicable) every now and then according to decrees. At the early 80's since it got too difficult to be legislating constantly the new tariffs, which were eaten alive by inflation before being implemented, the idea was to link them to a base price that anyway had to be modified as pertaining by mexican legislators. The most widespreadly used price tag that has always been subject to decreed increases is the daily minimum wage.

Other issue is that there are three numbers nationwide for the Minimum Wage in Mexico.

Just to set another example where inflation turned rampant with an inflation in wages that kept losing in real terms and has not "catched" price inflation until both were leveled to a single digit.


Very interesting parallels that you noted for Mexico, and especially that it also started in the '70s. Thanks... and for once I'll refrain from any tinfoil hat views about the parallels. ;)

GRG55
06-23-08, 03:46 PM
a chat I had with an econ friend of mine who's at MIT:


" inflationary spiral .. that's the key thing to control here ... i mean all you need is sufficient consumption curtailings to induce that to not happen -- could include maintaining low wages among other things ... the oil shocks i think as they run their course will induce this anyway .. im not concerned about an inflationary spiral. .. this is cuz the oil shocks .. ppl tend to misread it as an increase in the price of a huge component of our consumption bundle. the better way to understand it is like an adverse productivity shock -- it makes us less cost effective in production in all industries because its like increasing the marginal cost everywhere. "

Presumably there wasn't sufficient "consumption curtailings" to contain the inflationary spiral that was ignited by the oil shock in 1973 then?

The food and fuel "shocks" we are seeing are the manifestation of an inflationary spiral that is now looks very much baked in the cake. The danger I sense is the belief that some sort of "consumption curtailment" is the modestly painful and politically manageable (as opposed to excruciatingly painful and politically unacceptable) exit solution from the box the Central Bankers and FIRE economy interests have put us in.

ASH
06-23-08, 05:17 PM
But when loans are written off through default, there is no deflation because the money that was borrowed into existence was already spent and remains in the economy.


but the note was near-money. when i own a tbill, e.g., i think i'm holding money, even though i'm just holding a note. when loans are written off through default, the holders of those formerly valuable loans feel much poorer.


I recently got around to reading Galbraith's "Money: Whence it Came; Where it Went", and he says pretty clearly that both the credit and the loan function as money. It makes sense to me. The borrower can spend the credit, and the debt can be bundled and sold, or used as the capital base for futher lending. Therefore, the way I understand it, creating a loan for $X effectively increases the money supply by twice $X.

It seems to me that if the loan is defaulted upon, then instead of twice $X running around in the economy, we are left with $X -- so the money supply has decreased. That said, the money supply is still larger than it was before the loan was made, since $X is still out there.

Is this perhaps the distinction between dis-inflation and deflation? It seems that default does destroy money, but only the half that was created by the original loan.

Complications occur to me. Even if the money supply doesn't shrink relative to its size before the loan was made, it still shrinks relative to what it was before the default. Further, it could shrink relative to the supply of goods and labor. You could see prices decline, I suppose. There's also the impact upon money creation to consider -- loan defaults lead to weak balance sheets and reduced credit creation. Banks could choose to collect payment on outstanding loans but not re-lend the money. If the capital base contracts as the result of some defaults, then you would expect a period of money destruction as loans that aren't in default get paid off, but banks fail to re-loan the money. There is also a leverage effect, since banks loan a multiple of their reserves. Default on a small number of loans could result in destruction of a much larger sum of money in the form of paid-off loans that aren't re-issued.

By the way -- I am not a deflationist. I drink the iTulip koolaid (plus I tend to believe my own eyes.) I just wanted to point out that it isn't the change in the supply of money which matters, but rather that change relative to the change in the supply of things you can buy with money that matters. One should also think about the capital base from which banks make loans.

phirang
06-23-08, 05:25 PM
gaaaah ash, you're slaying the deflationary demons!!!

FRED
06-23-08, 05:37 PM
Rick and EJ continue the discussion, below.


Rick: Better you should ask how the yen performed relative to all other classes of yen assets. Answer: Just fine. Gold in fact has always done relatively well as an investable (sic) during deflationary times. Still, as a hard-core deflationist, I have my doubts that the POG will get to Sinclair’s promised land above $5000 oz.The yen performed well because the yen is not a reserve currency, the Japanese experienced a hyperinflation after the war, and so protecting the yen was more important than preventing deflation. In contrast, the Fed is throwing the dollar under the bus to prevent deflation. It works – too well.

Please take another look at the Argentina example. The relationship between the dollar and gold now for the US is similar to the relationship between the peso and the dollar for Argentina in the late 1980s. Deflation in domestic peso terms, yes, inflation in dollar terms, yes also. Asset prices are falling in dollar terms but crashing in euro terms.


http://www.itulip.com/images/dowineurosJan2007-Jun2008.gif


Not only US stocks but US real estate is cheap if you are a European.

Wage rates increased in Argentina during their 1988 - 1991 inflation but an American company could buy labor in Argentina for pennies on the dollar. Today US wage rates are 50% lower in euro terms than a few years ago -- great if you are a European company paying employees in the US. US wages are deflating against commodities priced in dollars, and domestic commodity prices, to the extent that these are determined by imports, are continuing to inflate.

Oil not gold is the ultimate money as it is the critical input to everything else. As Peak Cheap Oil arrives, everything is deflating against oil, which we experience as commodity price inflation. This event is widely misunderstood as a demand shock. Oil demand in OECD nations has declined to 2% annual growth rates since 2004 as oil prices doubled then doubled again. As China and oil producers are starting to reduce subsidies, demand may fall some more, but we'll see how long the oil kelptocracies and Chinese state continues with that program -- government give-aways are all they have to maintain political legitimacy. Meanwhile, oil producers have demonstrated that they intend to keep more of the oil they have left in the ground, so in spite of politically motivated assertions to the contrary they are not increasing supply but cutting it faster than demand is falling.


Rick: But I have no qualms about assuring my subscribers that gold is all but certain to hold its purchasing power – not only relative to all other classes of assets, but relative to anything that you would care to call money.
Gold is an international currency. As governments print to reflate economies, the value of national currencies deflate against gold.

My theory since 2001 is that this process will eventually take gold to $2500. Needless to say, that was contrarian back when gold was trading at $270. At $900 we have new entrants with very deep pockets to take us to the next stage of the market:

"Gold prices may rise to $5,000 an ounce (http://www.bloomberg.com/apps/news?pid=20601081&sid=aF1439PVhAgk&refer=australia) as investors seek to protect themselves against accelerating inflation, said Schroder Investment Management Ltd., which oversees $277 billion of assets globally."
If funds keep throwing billions at the gold market, and CBs become net buyers as Schroder expects, who knows – maybe we'll get to $5000. The paradox is that the guys who created this mess are the same guys who are now struggling to maintain the purchasing power of all the money they made on it. The rest of us are collateral damage.


Rick: Even more certain is that, on a day in the not-too-distant future, Americans will realize that the hundred dollar bills they carry in their wallets are fundamentally and intrinsically worth no more or less than the $1 bills. I can’t tell from your writing whether you understand this, but if you do, it should disabuse you of the notion that the economy is somehow going to continue to muddle along. Muddling is one thing we deflationists all strongly agree cannot continue for much longer.

I have no allusions that the US economy can muddle along. For a quick summary of my positions, I recommend:

USA, Inc. Common Shares: Long or Short? (http://www.itulip.com/forums/showthread.php?p=7131#post7131)

A Financial Market Crash is a Process, Not an Event (http://www.itulip.com/forums/showthread.php?p=13997#post13997)

The Myth of the Slow Crash (http://www.itulip.com/forums/showthread.php?p=15103#post15103)

Rick: Concerning deflation and its symptoms, there is little I would care to add to the story I linked from the Chicago Tribune (which you have yet to acknowledge and presumably did not bother to read). When middle-class America cuts out lattes and starts refilling soda-pop containers, that is not inflation, or stagflation, or hyperinflation; it is a small step toward Depression, when almost nothing pleasurable, or that we currently take for granted, will be affordable.

I did read it. Substitution always occurs during inflations. See:

Inflation in America - Part I: Five signs of inflation (http://www.itulip.com/forums/showthread.php?p=34140#post34140)
This will go on and on for years and years as living standards decline. Inflation is easier for people to adjust to than you'd think, certainly easier than 25% unemployment and no money around to buy anything, as was the policy choice in the 1930s as wealth holders pressured the State to stick to the gold standard which tied the Fed's hands to create inflation. As soon as the US went off the gold standard in 1933 and gold was re-priced, an instantaneous spike in inflation from -10% (deflation) to +15% (inflation) resulted.


http://www.itulip.com/images/USdeflation.png


This inflation occurred after thousands of banks failed and the banking system had basically cratered. Those who hold fast to the theory that we are going to see commodity and wage price deflation as an outcome of this credit bubble don't seem to understand this part of the history of the last US credit bubble.

By the way, the gasoline sign using to illustrate the Five Signs of Inflation piece was created using a web tool atom.smasher.org. Actual gas prices at the time in April were around $3.50 for regular and few believed that regular gas was going to rise of over $4. Now the sign looks like what you see everywhere. Soon those prices will look quaint.


Rick: Like Mish, I’m not looking for an argument -- I simply don’t have the time.

If I'd been forecasting deflation for years on end and a google news search produced 136 times as many results for a search on "inflation" versus "deflation" (142,539 search results vs 1,043 search results), I'd be looking to make some adjustments in my model.

The only major adjustment that I've had to make is my forecast is on long term interest rates. I expected they'd have turned up by now, given the high levels of inflation. A friend who is a hedge fund manager running $1B told me in March he was finally taking huge short positions in long treasuries. He moved into the 10 yr at 3.34% and now it's at 4:16%. Good move. Will yields continue up and prices down?

Here's a surprising voice added to the inflation chorus: (http://www.forbes.com/markets/2008/05/30/consumer-confidence-update-markets-econ-cx_md_0530markets20.html)

When asked about the potential for stagflation, a combination of weak growth and high inflation, Greenspan said, "Oh certainly."

Greenspan also said, contrary to the opinion of many, that there isn't a commodities bubble building. "Once you get inflation pressure starting to emerge, you don't get bubbles." he said. (Forbes, May 2008)
I'm sure Bernanke wasn't too happy about that pronouncement.

But I would be grateful if you would provide me with a bullet-point synopsis of the major economic events that you expect to occur over the next 7-10 years. That will be the easiest way for me to determine whether I may have misunderestood you. Do we perhaps envision the same endgame -- an economy in smouldering ruins, credit markets wrecked for at least a generation, widespread poverty and unemployment to match or exceed the Great Depression, and the U.S. having to rebuild its manufacturing capacity almost from scratch in order to make an honest living in the global marketplace? If that’s “stagflation,” or hyperinflation, then you needn’t bother to respond.

I'm writing a book for Penguin (http://articles.latimes.com/2008/mar/26/entertainment/et-bizbooks26) that explains a tough transition period. We took a wrong turn in the 1970s. Now we have to go back and fix it.

The thesis of the book may help you understand where I'm coming from:

Working title: The New New Deal, Re-industrialization of Post Depression America

The recession that the US is entering in the early part of 2008 is not a typical business cycle recession or even a post bubble recession as occurred in 2001. The collapse of the housing bubble and the energy price shock are the triggers that started a process of major structural change in the US and World economy. When the transition is over in a decade, the US economy will hardly resemble its current form:


Dependence on foreign borrowing to finance consumption and operate the government will end and reverse
Dominance of the Finance, Insurance and Real Estate (FIRE) sectors of the economy for economic growth will give way to new productive industries in transportation, energy, and communications
Trade deficits that started in the early 1980s will reverse and the US will begin to run a trade surplus
Burden of economic rent extraction in the form of interest on public and Private sector debt will be lifted via a combination of inflation, restructuring, and debt cancellation
Low national and household savings rates will rise to 1960s levels
Consumption will decline by half, from 70% of GDP today to 50% of GDP
Energy intensity, the amount of energy needed to produce a dollar of GDP growth will decline by half, led by conservation initiatives

The US will experience the transition as a series of recessions which,
cumulatively, may be as severe as in The Great Depression, but inflationary versus deflationary. We are seeing the first of these now.

The New New Deal asks and answers:

How did we get into this mess?


Why have US financial markets been in turmoil for over a year?
Why has the dollar weakened over 40% since 2002?
Why is inflation rising?
Why is unemployment rising?
Why are asset prices falling?

How are we going to get resolve our crises?

My publisher doesn't want me sharing the solutions part of the book, but basically the idea is that unlike the old New Deal, this time we unleash markets on the problem, with equity versus debt based financing.

grapejelly
06-23-08, 05:46 PM
but the note was near-money. when i own a tbill, e.g., i think i'm holding money, even though i'm just holding a note. when loans are written off through default, the holders of those formerly valuable loans feel much poorer.

Yes, but a default affects the ability of the holder (like a bank) to extend credit in the future but is not deflationary itself.

This is a key point and I don't know why people miss it. We can have widespread defaults on loans and no deflation. Deflation will happen if the money supply shrinks through people paying down their debts.

Think of it in central bank terms.

When they want to shrink the money supply (hahahaha they never do), the central banks sell debt to the banks, and take back dollars. This is the same as borrowing from the banks. When they want to increase the money supply, they buy debt from the banks...same as lending money to the banks.

Borrowing is inflationary.

Paying back is deflationary.

Debt default is not deflationary.

And, further, inflation is a big problem when there are widespread debt defaults because new money is borrowed into existence and this new money WON'T go into more investment. It will be borrowed in order to be invested in tangibles and therefore result in higher commodity prices.

(Not higher real estate prices due to the fact that real estate prices are credit-dependent.)

Mish and Rick don't get this. And they don't get the fact that consumers and businesses don't need to borrow...the borrowing can be done by other actors.

ASH
06-23-08, 06:03 PM
gaaaah ash, you're slaying the deflationary demons!!!

Just like the preposterous recruiting commercial!

But seriously... there are people whom I think know more about economics than I, who seem to take the deflationary scenario seriously. I am under the impression that the debate really boils down to what the government (and Fed) will do -- and how American consumers of credit will respond. I think EJ and the iTulip crowd have it right, but fundamentally this argument is more about handicapping government strategy and consumer response than it is about objective economics. I mean -- it isn't as though deflation is technically impossible. Rather, it is a question of how alert the Fed is to deflationary threats versus inflation (cue snide reference to helicopters), whether they have the ability to successfully halt a collapsing credit bubble and re-inflate (cue snide references to printing presses), and whether over-extended American consumers will borrow if even more credit is extended to them under easier terms (cue snide reference to deranged weasels).

phirang
06-23-08, 06:06 PM
Just like the preposterous recruiting commercial!

But seriously... there are people whom I think know more about economics than I, who seem to take the deflationary scenario seriously. I am under the impression that the debate really boils down to what the government (and Fed) will do -- and how American consumers of credit will respond. I think EJ and the iTulip crowd have it right, but fundamentally this argument is more about handicapping government strategy and consumer response than it is about objective economics. I mean -- it isn't as though deflation is technically impossible. Rather, it is a question of how alert the Fed is to deflationary threats versus inflation (cue snide reference to helicopters), whether they have the ability to successfully halt a collapsing credit bubble and re-inflate (cue snide references to printing presses), and whether over-extended American consumers will borrow if even more credit is extended to them under easier terms (cue snide reference to deranged weasels).

You're completely correct: a friend of mine is doing his econ phd at MIT, and while he's not macro, he knows bernanke's work... and ultimately, it's the capricious voting masses that will drove the inflationary sword into their own bellies'.

Ceterius paribus and without politiks, without a doubt we'd enter a deflationary spiral. Yet, that tenacious political dimension persists and makes everything a fking 6-sigma event.

FRED
06-23-08, 06:15 PM
Mish and Rick don't get this. And they don't get the fact that consumers and businesses don't need to borrow...the borrowing can be done by other actors.

Indeed, we've showed them this diagram and explained it to them before.


http://www.itulip.com/images/moneyflows.gif


We're patient guys. We're happy to explain it again.

Money once borrowed into existence rarely disappears. Most money continuously changes form as it flows through the economy. As consumers and businesses reduce their borrowing of new money into existence, the government can increase its borrowing of new money into existence.

bart
06-23-08, 06:34 PM
As consumers and businesses reduce their borrowing of new money into existence, the government can increase its borrowing of new money into existence.




And how "convenient" the cover of the drop in the System Open Market Account is for that eventuality.

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

ASH
06-23-08, 08:01 PM
Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To know that for destruction ice
Is also great
And would suffice.

Robert Frost

You, sir, win the Galactic Institute's Prize for Extreme Cleverness! Bravo!

zmas28
06-23-08, 10:21 PM
I'm not understanding this too well.
Lets say A lends B $100. B ends up with $100 cold hard cash, and $100 in hock in the ledger. A ends up with no change, since he gave up $100 to B but got back an IOU for $100 which security we assume he can mark to market at $100. Net system result is that we generate a security (IOU) worth $100 for a -$100 entry in B's ledger. The negative entry has no value as it cannot be traded. This increases the credit in the system by $100. This is System at state 1 (up $100 in tradeable assets).

If B now defaults on the loan and is unable or unwilling to pay, the only effect I see (other than the fact that A is screwed) is that the IOU now becomes worthless. This represents a deflationary change from state 1 at which time our monetary system was up by $100. The debt default was deflationary because the security became worthless.

If, instead B repays the loan amount to A, then A returns the IOU to B and we're back to where we started at time zero. Net result zero, which represents a deflationary change from state 1.

So terminating the loan and therefore the security is deflationary either way. The green stuff doesn't die unless someone retires it; it can grow by printing more. The virtual stuff (credit) can grow or die. Yess-no?

phirang
06-23-08, 10:24 PM
from my econ friend at MIT:

Empirical facts:
1. define seignorage as revenue from money creation. historically hyper inflation -- has it been due to bubbles or money growth policies which don't maximize seignorage?
A: if you take the perspective of adaptive expectations, you will find that it is due to bad mismanaged money growth policies. if you take the perspective of rational expectations, bubble theories can explain it. personally -- i am inclined to think adaptive expectations paints a more accurate picture of the mechanism. i think most neuro research and most psych+econ research suggests that people operate with adaptive type expectatiosn.
2. real variables are pro-cyclical (consumption, investment vary with output). here by cyclical i mean the phase is in sync with gdp or output.
3. real wages are acyclical.
4. exportation is acyclical -- the us is surprisingly closed despite what people like to thikn.
5. government spending is acyclical.
6. employment procyclical but lagged -- so movement in output followed by movement in employment.
7. productivity procyclical but in terms of ability explain output, productivity becomes a very small component.
8. real interest rate is slightly counter cyclical.
9. nominal interest rate is slightly pro cyclical.
10. money is procyclical, both nominal and real money. this also means that in the short run M can move with Y and M/P can move with Y, meaning we can think of P not responding one for one with Y. (suggests rigidity in P, where P is some average price measure.)
11. firms are not perfectly competitive.
Why do I list off this? Because any framework or language to discuss macro questions actually needs to be able to account for all of this behavior. The way most people talk about typical macro issues, they look at things in isolation. They have a theory of inflation in their head or a theory of employment. But it isn't clear that when you put these isolated narratives together, they actually can co-exist in a macro-framework story!
Framework stuff:
1. stories without nominal rigidities do not allow us to say that money is neutral or super neutral. this means that unless we assume a sort of nominal rigidity (general commodity prices or wage prices) we won't have real effects of money. but our stylized facts suggest otherwise.
2. because no1 seriously thinks there is perfect competition, monopolistic competition is a much better way to look at things. the nice thing is that this framework treats firms as seeing a market average price, and pricing their marginally differentiated good accordingly. this actually is a good language to discuss rigidities.
3. we want to model the mechanism of the rigidity. there are a number of different stories you could tell. you could think about at each t, some group of firms seek to reevaluate their prices, p_it-1, and make it into p'_it. so now at t, the market average price P_t-1 changes to P'_t. the way to spice up the story -- (a) firms only respond in price to sufficient changes in their own cost above a threshold -- they don't change/respond to differential movements, (b) menu costs, (c) mis-pricing theories, (d) timed price contracts -- think about labor-wage contracts that go on for months or years that do not respond to things like changes in CPI or other factors. the point is there are a LOT of (fairly convincing) stories to be told why firms aren't magically updating their prices perfectly. this is one simplified story i am giving you, but you can do much more intricate narratives. the point is you get very similar results.
the result from these stories is: (a) price stickiness, (b) not (much) inflation stickiness. observe that these frameworks still adhere to a rational expectation. this suggests we need to...
4. modify the narrative a bit by including adaptive expectations. people overweight recent information relative to other past information.
Conclusions to be drawn:
1. loosely speaking you have 3 margins to discuss:
(A) the output today is increasing in expected future output, and decreasing in the real interest rate. (this means that output today is decreasing in the nominal interest rate and increasing in expected inflation). this makes sense right? if the real interest rate is really high, you want to save more. or alternatively, if inflation is going to be super high tomorrow, you might as well just build your products today and sell today right?
(B) the nominal interest rate is decreasing in money balance, increasing in price, increasing in output. again this should pass the intuition of the smell test.
(C) inflation today is not only an increasing function of our deviation from optimum (i.e. our output without rigidities minus output due to rigidities, shocks), but also of future expected inflation, and with adaptive expectations a bit due to previous inflation. so an oil shock, think about it as a productivity shock, actually decreases the output due to rigidities, shocks, and therefore increases inflation today. the actual mechanism of this is due to the micro individual and firm behavior story we told before.
by the way, why do we talk about this difference between output w/o rigidities and output with rigidities. well if you believe that efficiency is a good normative outcome, w/o rigidities, in a market w/ monopolistic competition, this outcome is pareto optimal. let us call it the second best outcome. it is second best is b/c first best would be if we had perfect competition, but unfortunately we do not. so the way to understand it is that rigidities, shocks -- they move us away from second best which means that it is welfare harming. so our policies should be reactionary to move us back to second best to be welfare improving. (this is the intuition.)
now this is a very trivialized story and in practice no1 uses this per se. it is a pedagogical tool. but for conversation purposes, the reason it is a good thing to have in mind is because it gives you a coherent narrative of the macro economy that does fairly well to systematically explain all the macro-metric facts. in practice what is used is called Dynamic Stochastic General Equilibrium.
by the way it is worthwhile to mention that this stuff is actually used in practice. now i dont know if people are aware of this at the everyday level on wall st. because what happens is that it is usually contracted or some really hardcore quant phd is hired to run these things. and then the general conclusions are presented more in the style that i talk of above. but the pt is any real macrometric analysis that is done nowdays is only through DSGE. the Fed uses DSGE, the IMF, and more importantly every consulting company for businesses, they hire lots of macro-metric guys to run DSGE for them. so i imagine the macro-metric guys don't get the big bucks for nothing, otherwise mckinsey is just being dumb, no? many (most?) hedge funds also seem have quants that run DSGE somewhere. i think the problem w/ DSGE is that it is pedagogically and conversationally unattractive cuz of its complexity. so basically if you have intuition X, just ask a quant to run a DSGE to see if the conclusion is close to X. if so, just present your intuition X in the meeting and then move on, instead of using the DSGE, you know?
2. ok so let us look at the quote there.
my big issue is up top where he says basically people borrow "too" much relative to economic growth. specifically he says "do not understand that inflation is created by borrowing money. That is how money is created. Through borrowing. Inflation happens when people borrow at a rate that exceeds the rate of economic growth."
what does that mean? well, let's write a simple linearized model so i can talk about variables:
(A) y = Ey - a(i-Epi) = Ey - ar
(B) m-p=by-ci
(C) pi=Epi+d(y - y_sb) where y_sb is the second best output.
that is today's output is a function of expected future output and decreasing in real interest rate. why is it linear? well if you had a multi-dimensional model in which people were making decisions about things through time, you will have some equilibrium path. because firms and people are trying to do the best they can (i.e. optimizing), their decisions actually lead to a welfare optimum point. so what we care about is when the system moves away from the welfare optimum-- that is, deviations from equilibrium path. therefore you can log-linearize the system around a steady state and think of the linear equations above as log deviations from steady state.
what does people borrowing too much mean. intuitively this means that people today are demanding too much, higher y, and therefore in (C) the y-y_sb term is too high, i.e. non-zero, and therefore pi is higher. that is fine. except when you think about it, people borrow whatever they want given interest rates. that is actually the equilibrium outcome. this model talks about deviation from trend. so we can even think of the inflation here as deviation from trend inflation. the type of inflation your friend is talking about isn't the central "bad" inflation. there is, if you will, some regularized or trend notion of inflation that will occur, just like you will have some regularized or trend notion of growth, etc. where things are "bad" is when we get pushed out of an efficient equilibrium -- deviations from trend. people borrowing is an optimizing behavior in response to some price/interest rate scheme. so there isn't anything out of equilibrium with that unless you give a neuroscience style story of time inconsistent consumer myopia. (now i do research on that and i'm inclined to listen to such stories. but this isn't the position your friend is offering.)
now maybe what your friend wants to say is something like there is an adverse productivity shock which means y_sb (the natural output) is actually lower now because productivity is lower. and say we expect this to be persistent, so y_sb tomorrow, day after, all are lower. in turn people don't want to save and want to eat more today by borrowing. this means that the y-y_sb term is lower and therefore by (C) pi is higher. but observe that it wasn't borrowing or "over-borrowing" that was the exogenous culprit of the inflation increase. it was actually a productivity shock that bucked us off trend. over-borrowing was only the mechanism through which people could actually eat too much today.
my more broad point is that i think he doesn't frame thinking about inflation problems the right way. it is important to frame things correctly to draw the right conclusions. look some of his descriptions, mechanistically, sure, they are correct. but they do not at all tackle the deeper inflation problems. and that doesn't help us because it doesn't address what we could do to fix the problem.
yeah people shouldn't make snapshot judgments of inflation by wage prices perhaps. (does he mean real or nominal by the way?!) but a deeper reason for why is because wage prices themselves could have lots of rigidities. they are certainly not rapid moving creatures. and the way you tell your rigidities stories, that fully informs how you use wage data and price data to get a sense of the inflation!
i hope that helps ... it was probably annoyingly long ... anyway i am not a macro guy. i have a lot of methodological and theoretical issues with macro. that is for another day though =) ...

Contemptuous
06-24-08, 02:33 AM
Rick Ackerman is a very smart, persuasive and eloquent commentator. He's a decent guy too. But he has his head firmly tucked under the blankets in 2008. What part of this data does not at least inspire his professional curiosity?

The following table lists year-over-year inflation as of June 2008

http://origin.ih.constantcontact.com/fs003/1101357242253/img/265.jpg?a=1102140417362

FRED
06-24-08, 09:56 AM
Interesting comments. Not clear who is the "he" your friend is referring to?

phirang
06-24-08, 10:45 AM
Interesting comments. Not clear who is the "he" your friend is referring to?

"firiend"

I think the two big mistakes that people make is to judge inflation by wage prices, and to fail to understand the debt default is not deflationary.
First, Rick and Mish do not understand that inflation is created by borrowing money. That is how money is created. Through borrowing. Inflation happens when people borrow at a rate that exceeds the rate of economic growth.
Second, folks like Rick and Mish believe deflation happens through defaulted loans. Their argument is that widespread defaults lead to deflation.
But when loans are written off through default, there is no deflation because the money that was borrowed into existence was already spent and remains in the economy.
Only paying back loans results in deflation, because only paying a loan back removes that money from the economy. Paying back loans is flipside of inflation. Defaults are not the flipside of inflation. You can have widespread defaults and still have high inflation, but you cannot have people paying back their loans without a falling money supply and deflation.

MLM
06-24-08, 11:49 AM
A significant difference between Argentina and the U.S. is the percentage of the global economy the U.S. represents. Argentina had a large "heat sink" to work against. The U.S. is big enough as a consumer that knock-on effects in the rest of the world will be significant.

ASH
06-24-08, 12:59 PM
I'm not understanding this too well.
Lets say A lends B $100. B ends up with $100 cold hard cash, and $100 in hock in the ledger. A ends up with no change, since he gave up $100 to B but got back an IOU for $100 which security we assume he can mark to market at $100. Net system result is that we generate a security (IOU) worth $100 for a -$100 entry in B's ledger. The negative entry has no value as it cannot be traded. This increases the credit in the system by $100. This is System at state 1 (up $100 in tradeable assets).

If B now defaults on the loan and is unable or unwilling to pay, the only effect I see (other than the fact that A is screwed) is that the IOU now becomes worthless. This represents a deflationary change from state 1 at which time our monetary system was up by $100. The debt default was deflationary because the security became worthless.

If, instead B repays the loan amount to A, then A returns the IOU to B and we're back to where we started at time zero. Net result zero, which represents a deflationary change from state 1.

So terminating the loan and therefore the security is deflationary either way. The green stuff doesn't die unless someone retires it; it can grow by printing more. The virtual stuff (credit) can grow or die. Yess-no?

Hi zmas. I think the basic issue is that A is a bank, and when A makes a loan, it generates credit rather than "giving up" money. It isn't loaning physical money from its vault. The ability of A to create credit is only constrained by its reserve fraction requirement. When it creates credit, the deposit that is presented to the borrower doesn't come out of the bank's reserves -- rather, it is creating something that theoretically COULD be redeemed from the reserves if one so chose. As long as that credit is convertible into "money", it serves as money itself. That is why credit creation effectively adds to the money supply. The reserve fraction requirement sets a limit on how much credit a bank is allowed to create against its reserves. If everyone tried to collect from the reserves at once, then the bank would be screwed, because it ain't 1:1. In fact, one of the best articles in the iTulip archives is What (really) happened in 1995? (http://www.itulip.com/forums/showthread.php?t=292) by Aaron Krowne. It explains that the reserve fraction requirement was actually abolished for certain types of accounts.

So, from the standpoint of the money supply, in state 1, A has a security to market and B has a deposit at A to spend. A does not in fact have a balancing reduction in its reserves. Rather, its ability to create further credit against its reserves has been reduced by a fraction of the value of the loan.

If you now accept that in state 1 we're up by $200 instead of $100, then we're on the same page.

DISCLAIMER: I ain't no expert. This is how I understand credit creation and the banking system, but it is possible that I'm laboring under a massive misconception. I hope that the more knowledgeable members of the community will correct me if I have erred.

zmas28
06-24-08, 10:56 PM
Hi zmas. I think the basic issue is that A is a bank, and when A makes a loan, it generates credit rather than "giving up" money. It isn't loaning physical money from its vault. The ability of A to create credit is only constrained by its reserve fraction requirement. When it creates credit, the deposit that is presented to the borrower doesn't come out of the bank's reserves -- rather, it is creating something that theoretically COULD be redeemed from the reserves if one so chose. As long as that credit is convertible into "money", it serves as money itself. That is why credit creation effectively adds to the money supply. The reserve fraction requirement sets a limit on how much credit a bank is allowed to create against its reserves. If everyone tried to collect from the reserves at once, then the bank would be screwed, because it ain't 1:1. In fact, one of the best articles in the iTulip archives is What (really) happened in 1995? (http://www.itulip.com/forums/showthread.php?t=292) by Aaron Krowne. It explains that the reserve fraction requirement was actually abolished for certain types of accounts.

So, from the standpoint of the money supply, in state 1, A has a security to market and B has a deposit at A to spend. A does not in fact have a balancing reduction in its reserves. Rather, its ability to create further credit against its reserves has been reduced by a fraction of the value of the loan.

If you now accept that in state 1 we're up by $200 instead of $100, then we're on the same page.

DISCLAIMER: I ain't no expert. This is how I understand credit creation and the banking system, but it is possible that I'm laboring under a massive misconception. I hope that the more knowledgeable members of the community will correct me if I have erred.

Ash, thanks for an interesting discussion. I agree that a bank can create money because its reserve ratio is less than 1. So at state 1 in this case (when A is a bank), the system has added more than $100 but (I think) a little less than $200, the exact amount depending on the reserve requirement (here I'm thinking that, on average, the bank would be required to retain a fraction of the deposits).
But my thought is that debt termination by either default or through repayment is, in fact, deflationary because it destroys the debt security.

Charles Mackay
06-25-08, 11:20 AM
Defaulting on a bank loan is not the only type of default. If my portfolio consists of GM stock and GM bonds and that company goes broke, my wealth disappears.. that is deflationary for me personally. If that happens to a hundred million people it's deflationary for the country as a whole. You can argue that that money was spent by GM "and is still out there" but it's in the form of worthless buildings, equipment, and now unemployed workers.

ASH
06-25-08, 12:40 PM
But my thought is that debt termination by either default or through repayment is, in fact, deflationary because it destroys the debt security.

I'm in agreement with you there. It's a question of what your basis is. My understanding is that those who are arguing that loan defaults "don't reduce the money supply" mean relative to the basis before the loan was made. Obviously, destruction of the debt security DOES reduce the money supply relative to the basis after the loan was made.

So, in the simple analysis, a loan default doesn't return the money supply to the state it was in before the loan was made because the credit is still out there. However, as I pointed out earlier, if a bank was counting upon a pile of bad debt securities to be part of its reserves (perhaps indirectly), then it will choose to reduce its portfolio of loans -- and the resulting reduction in the money supply will be leveraged by the reserve fraction. That mechanism could potentially reduce the money supply by more than the amount created by the original loan -- quite deflationary.

So much for the debt securities... what can wipe out the credit created by the loan? Bank defaults. The extra money relative to the basis before the loan is in the form of bank credit. Once those credits can no longer be exchanged for money (because the bank folds) they cease to function as money.

I also agree with Charles Mackay's observation about other types of asset deflation, although I suspect an economist (which I'm obviously not) -- or EJ -- might prefer to draw a clear distinction between changes to the money supply versus general asset price deflation. I think the point of bubble sites is that one is expecting asset price deflation; about the only debate we could be having is over the ultimate impact on the money supply. Right now we're seeing asset price deflation of houses concurrent with rising prices for gasoline. I thought the inflation/deflation debate was over whether or not we'd continue to see consumer prices rise, with both parties agreeing that the price of bubble assets would fall.

Again, the way I read the official party line, no one should be claiming that deflation is impossible. If deflation following the collapse of a real estate bubble were impossible, then Japan's lost decade (or is that lost two decades?) wouldn't have happened. Rather, iTulip has been saying that we'll get inflation as the result of Fed policy designed to head off the threat of deflation.

Charles Mackay
06-25-08, 01:53 PM
I also agree with Charles Mackay's observation about other types of asset deflation, although I suspect an economist (which I'm obviously not) -- or EJ -- might prefer to draw a clear distinction between changes to the money supply versus general asset price deflation.

I was just musing that a bond market default is potentially a much bigger problem than bank loan defaults. Is a bond default considered asset deflation and a bank loan default a money supply deflation? ... I'll leave that to others. But as far as my investment stance is concerned, I'm betting that inflation will win out. I AM extremely worried about a stock and bond market crash set off by a scary dollar sell off this summer/fall. It's a Fibonacci 21 years since that exact scenario played out in 1987 and that happened when we were in a bull market. Now we are in a bear market (in real terms) and the outcome could be quite different...particularly when combined with the real estate crash that is in progress. And with California's median home price down 30% April 2008 over April 2007 it's certainly prudent to start labeling it a crash.

phirang
06-25-08, 01:56 PM
I was just musing that a bond market default is potentially a much bigger problem than bank loan defaults. Is a bond default considered asset deflation and a bank loan default a money supply deflation? ... I'll leave that to others. But as far as my investment stance is concerned, I'm betting that inflation will win out. I AM extremely worried about a stock and bond market crash set off by a scary dollar sell off this summer/fall. It's a Fibonacci 21 years since that exact scenario played out in 1987 and that happened when we were in a bull market. Now we are in a bear market (in real terms) and the outcome could be quite different...particularly when combined with the real estate crash that is in progress. And with California's median home price down 30% April 2008 over April 2007 it's certainly prudent to start labeling it a crash.

I think we need to start focusing on China: how will China manage inflation in the case of continued US inflation? Will they sell off the dollar, raise rates, or just attack subsidies?

China experts, please chime in.

Charles Mackay
06-25-08, 02:37 PM
I think we need to start focusing on China: how will China manage inflation in the case of continued US inflation? Will they sell off the dollar, raise rates, or just attack subsidies?

China experts, please chime in.

I'm not a China expert but that's never stopped me before :D. I'm betting they will continue with baby steps, a little bit of yuan appreciation, a little bit of tightening...not too much!, and a little slowing of US dollar purchases.

In the meantime, after the FOMC meeting, YOU ARE NOW FREE TO MOVE BACK INTO YOUR INFLATION HEDGES!

bart
06-25-08, 02:45 PM
The yuan appreciation rate has grown quite a bit in the last few months.

http://www.nowandfutures.com/images/yuan1.png

phirang
06-25-08, 02:49 PM
The chinese will have to lower their subsidies as their trade surplus attenuates do to global recession.

Thoughts?

* edit: Any data on china's exports to africa???

Contemptuous
06-25-08, 03:05 PM
The chinese will have to lower their subsidies as their trade surplus attenuates do to global recession. Thoughts?

Yes. The problem with such apparently rational excursions into prediction is that one has no idea if they will in fact occur, unless and until they do occur. If you proceed to add further conclusions on top of this assumption, don't forget the further conclusions are based on the preliminary assumption. You assume the Chinese lower subsidies. Well, yes, apparently they have already committed to this, so that appears correct. But then you assume a global recession. You risk building yet further assumptions onto whatever is built on the global recession thesis and it's stubbornly refusing to manifest itself.

Weren't you calling for an inevitable recession six months ago? Why are small cap stocks not collapsing in relative strength to large caps if we are already manifestly entering a global recession? Alright, global markets are correcting badly, but you get my point. Small caps don't offer any of the classic signs by plunging relative to large caps, and there is no global recession in modern history that's occurred without that happening, right? Global oil consumption ex America gives no hint of a global recession. Just because you can reasonably expect one does not mean it will arrive. China's trade surplus is now highly distributed globally, and a good portion of it is with trading partners in the Pacific Rim.

Their stock markets may implode, are imploding, but strangely their GDP does not reflect the dramatic stock market action. Too much Bloomberg screen oriented thinking leads to wrong conclusions. Meanwhile global oil consumption maintains a robust pace, inflation rates and commodities consumption (NOT commodities prices) maintain a robust pace. Methinks you are "still early" on calling a sharp decline in China's trade surplus too. All this waiting for the shoe to drop sure is frustrating, isn't it? If you see that global oil consumption, in the face of tight supply and blistering prices, is still rising robustly, maybe the global recession thesis needs a good careful going over. Very popular idea these days though!

__________________

China agrees to nearly double ore price

Agence France Presse

SHANGHAI - Baosteel, China's largest steelmaker, said Tuesday it had agreed to nearly double what it pays Anglo-Australian mining group Rio Tinto for iron ore.

Baosteel, acting on behalf of China's steel industry, negotiated to pay between 80 and 97 percent more than last year depending on the category of iron ore, which is used to make steel.

The new prices will affect all iron ore deliveries for the 2008 contract year that began on April 1, Rio Tinto said in a statement.

Baosteel called the deal mutually beneficial and said it would help the long-term development of the steel industry on both the mining and milling sides.

"Chinese steel companies will support Rio Tinto as it expands its investment and will increase output to meet market demand," Baosteel said in a statement.

The deal was "very significant" as iron ore is one of the three main drivers of Rio Tinto's earnings, along with copper and aluminium, a Rio Tinto spokesman said.

"The increase is higher than the 71 percent and 65 percent settlements announced by Brazilian mining giant Vale earlier in the year, reflecting both the strength of the market and an indication of the proximity of Rio Tinto's iron ore to its customers," he said.

Baosteel traditionally sets the price for the nation's other steel producers for internationally purchased iron ore.

Prices of iron ore have soared in recent years due to growing demand led by a construction boom in fast-growing China and India.

The latest increase also reflects rising transportation costs that have increased due to record oil prices.

China imported 383.09 million tons of iron ore in 2007, up 17.4 percent from the previous year, according to government figures.

c1ue
06-25-08, 03:07 PM
Once the Olympics are over, history will look at that event as the turning point in the China 'miracle'.

With the choice between raising the yuan (and internal incomes) to compensate for dollar depreciaion or risking a second revolution as increasing numbers of hungry people get angry, China chooses instead to convert its previous growth bent into an internal domestic satisfaction policy.

Rising wages and yuan drop China's growth into the moderate range: 5% a year. Investments into infrastructure slow down considerably.

The long term result is what is to be expected of a large, populous, but fairly resource poor nation: permanent 2nd world status.

Think Turkey.

phirang
06-25-08, 03:37 PM
Once the Olympics are over, history will look at that event as the turning point in the China 'miracle'.

With the choice between raising the yuan (and internal incomes) to compensate for dollar depreciaion or risking a second revolution as increasing numbers of hungry people get angry, China chooses instead to convert its previous growth bent into an internal domestic satisfaction policy.

Rising wages and yuan drop China's growth into the moderate range: 5% a year. Investments into infrastructure slow down considerably.

The long term result is what is to be expected of a large, populous, but fairly resource poor nation: permanent 2nd world status.

Think Turkey.

Some ppl at goldman agree, too:

http://www2.goldmansachs.com/hkchina/insight/research/pdf/China_Economics_Quarterly_1Q2008_eng.pdf

Charles Mackay
06-25-08, 04:05 PM
The yuan appreciation rate has grown quite a bit in the last few months.

consistent increase in the r.o.c. ...hmm, that is impressive.

I bought a little of the CNY ETF and the Merk Asian Currency Fund but so far they aren't keeping up with yuan appreciation. Look at the CNY lagging.

http://webpages.charter.net/bigboard/yuan-cny.jpg

bart
06-25-08, 04:24 PM
consistent increase in the r.o.c. ...hmm, that is impressive.

I bought a little of the CNY ETF and the Merk Asian Currency Fund but so far they aren't keeping up with yuan appreciation. Look at the CNY lagging.

http://webpages.charter.net/bigboard/yuan-cny.jpg


Good point... very few ETFs & ETNs do a good job of tracking their underlying item.

You're still doing well too. Nice trade. :cool:

GRG55
06-28-08, 02:30 AM
Once the Olympics are over, history will look at that event as the turning point in the China 'miracle'.

With the choice between raising the yuan (and internal incomes) to compensate for dollar depreciaion or risking a second revolution as increasing numbers of hungry people get angry, China chooses instead to convert its previous growth bent into an internal domestic satisfaction policy.

Rising wages and yuan drop China's growth into the moderate range: 5% a year. Investments into infrastructure slow down considerably.

The long term result is what is to be expected of a large, populous, but fairly resource poor nation: permanent 2nd world status.

Think Turkey.

Capital inflows to China
Hot and bothered

Jun 26th 2008 | BEIJING
From The Economist print edition
Despite strict capital controls, China is being flooded by the biggest wave of speculative capital ever to hit an emerging economy



Illustration by Satoshi Kambayashihttp://media.economist.com/images/20080628/D2608FN0.jpg
A POPULAR game this summer among watchers of the Chinese economy is to guess the size of speculative capital or “hot money” flowing into the country. One clue is that although China’s trade surplus has started to shrink this year, its foreign-exchange reserves are growing at an ever faster pace. The bulk of its net foreign-currency receipts now comes from capital inflows, not the current-account surplus.

According to leaked official figures, China’s foreign-exchange reserves jumped by $115 billion during April and May, to $1.8 trillion. In the five months to May, reported reserves swelled by $269 billion, 20% more than in the same period of last year. But even this understates the true rate at which the People’s Bank of China (PBOC) has been piling up foreign exchange.

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Logan Wright, a Beijing-based analyst at Stone & McCarthy, an economic-research firm, has done some statistical detective work to make sense of the figures. The first problem is that reported reserves exclude the transfer of foreign exchange from the PBOC to the China Investment Corporation, the country’s sovereign-wealth fund. The reserve figures have also been reduced in book-keeping terms this year by the PBOC “asking” banks to use dollars to pay for the extra reserves that they are now required to hold at the central bank. Adding these two items to reported reserves, Mr Wright reckons that total foreign-exchange assets rose by an astonishing $393 billion in the first five months of 2008 (see chart), more than double the increase in the same period last year.

http://media.economist.com/images/20080628/CFN512.gif

China’s trade surplus and foreign direct investment (FDI) explain only 30% of this. Deducting investment income and the increase in the value of non-dollar reserves as the dollar has fallen still leaves an unexplained residual of $214 billion, equivalent to over $500 billion at an annual rate. Some economists use this as a proxy for hot-money inflows. But some of it may reflect non-speculative transactions, such as foreign borrowing by Chinese firms. Mr Wright therefore estimates that China received up to $170 billion in hot money in the first five months of 2008. This far exceeds anything previously experienced by any emerging economy.

Michael Pettis, an economist at Peking University’s Guanghua School of Management, reckons that speculative inflows during that period were perhaps well over $200 billion, because hot money also comes into China through companies overstating FDI and over-invoicing exports. Foreign firms are bringing in more capital than they need for investment: the net inflow of FDI is 60% higher than a year ago, yet the actual use of this money for fixed investment has fallen by 6%. Some of it has been diverted elsewhere.

It is one thing to deduce how much money is coming in. It is another to work out where it is going and how it gets past China’s strict capital controls. The stockmarket, which continues to plunge (see article (http://www.economist.com/finance/displaystory.cfm?story_id=11637807)), is no home for hot money. Some has gone into property. The lion’s share is in bog-standard bank deposits. An interest rate of just over 4% on yuan deposits compared with 2% on dollars, combined with an expected appreciation in the yuan, offers a seemingly risk-free profit for those who can get money into China.

It comes in via various circuitous routes. Big Western investment funds which care about liquidity would find it hard to move money into China, although rumours abound of hedge funds that are investing money through Chinese partners. Trade and investment offers a big loophole for Chinese and foreign firms. Resident individuals can use the $50,000 annual limit for bringing money into China from abroad—many also use their friends’ and relatives’ quotas. Another big loophole lets Hong Kong residents transfer 80,000 yuan ($11,600) a day into mainland bank deposits.

The government is trying to crack down, but that risks shifting the activity towards underground money exchangers. And if the government were to increase its monitoring of FDI and trade flows, the extra bureaucracy could harm the real economy. China needs to reduce the incentive for destabilising capital inflows, rather than block the channels.

Massive hot-money inflows present two dangers to China’s economy. One is that capital could suddenly flow out, as it did from other East Asian countries during the financial crisis a decade ago and Vietnam this year.

China’s economy is protected by its current-account surplus and vast reserves, but its banking system would be hurt by an abrupt withdrawal.
A more immediate concern is that capital inflows will fuel inflation. The more foreign capital that flows in, the more dollars the central bank must buy to hold down the yuan, which, in effect, means printing money. It then mops up this excess liquidity by issuing bills (as “sterilisation”) or by lifting banks’ reserve requirements. But all this complicates monetary policy. China’s interest rates are below the inflation rate, but the PBOC fears that higher rates would attract yet more hot money and so end up adding to inflationary pressures. The central bank has instead tried to curb inflation by allowing the yuan to rise at a faster pace against the dollar—by an annual rate of 18% in the first quarter of this year. But this encouraged investors to bet on future appreciation, exacerbating capital inflows. Since April the pace of appreciation has been much reduced, in a vain effort to discourage speculators.
Mass sterilisation

Some economists argue that the problems caused by hot money have been exaggerated. After all, the PBOC has so far succeeded in sterilising most of the increase in reserves. Inflation, at an annual rate of 7.7% in May, has also started to decline, and the impact of last week’s rise in fuel prices is likely to be offset over the next couple of months by falling food-price inflation.

The snag is that money-supply growth would explode without sterilisation, which is now close to its limit. It is becoming very costly for the central bank to mop up liquidity by selling bills, so it is now relying more heavily on raising banks’ reserve requirements (the PBOC pays banks only 1.9% on their reserves, against over 4% on bills). Since January 2007 the minimum reserve ratio has been raised 16 times, from 9% to 17.5%. But it cannot climb much higher without hurting banks’ profits. To curb future inflation, China therefore needs to stem the flood of capital.

One solution would be a large one-off appreciation of the yuan so that investors no longer see it as a one-way bet. This, in turn, would give the PBOC room to raise interest rates. The snag is that the yuan would probably have to be wrenched perhaps 20% higher to alter investors’ expectations, and this is unacceptable to Chinese leaders, especially when global demand has slowed and some exporters are already being squeezed.

This implies that monetary policy will remain too loose. The longer that the torrent of hot money continues and interest rates remain too low, the bigger the risk that underlying inflation will creep up.

Contemptuous
06-28-08, 12:15 PM
Rick Ackerman wrote:

Quote:
<TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Rick: Like Mish, I’m not looking for an argument -- I simply don’t have the time. </TD></TR></TBODY></TABLE>

Here is a suggestion to Rick Ackerman and Mish Shedlock -

We here at iTulip well understand and appreciate that you are very busy further elaborating your investment theses for your clients. Such industriousness is laudable. However, in pursuit of that worthy aim, perhaps an occasional read of Doug Noland (from PRUDENT BEAR) might inform and enhance your investment theses on your client's behalf? Always good to read a few of the ideas of competent analysts with whom one disagrees, no? I must conclude instead, that you don't read him (or if you do, you summarily ignore his fact finding), as incorporating even a small fraction of Mr. Noland's painstakingly precise collection of data (which he collects and posts at Prudent Bear weekly) into your own investment advice would considerably complicate your task of rendering a coherent opinion on real-world, actionable trends to your clients. The question that comes to my mind rather, is whether you even permit any "agnostic" pursuit of developing macro-economic data as no trace of such capable reporting (these are not "op ed" pieces which Noland writes, after all) seems to find it's way into your analyses.

One has to wonder whether this is because incorporating this type of manifestly inflation-saturated data, which has been compiled quite factually and non-polemically by diligent analysts such as Doug Noland (or John Williams of SHADOWSTATS, whom Mish glibly refers to as a "nutcase") irreparably contradicts the present deflationist recommendations you offer to your clients.

Your writing has the function of encouraging people's viewpoints to adjust their investments for deflation. Writing articles about deflation is not a form of creative self expression. It is instead a form of investment advice. As advice, it actively works to dispel people's doubts that inflation may instead be a greater threat. Whenever these people "use their own eyes" and look around noticing the myriad intruding data to the contrary, such as Doug Noland notices, a read of your articles then "corrects" their viewpoint back to your deflation oriented ideas. You therefore bear at least degree of answerability, insofar as your articles may be persuasive in guiding people's investments, to make sure that you read sources which are contrary and incompatible with your deflationist theses - in order to effectively "challenge your ideas" on a regular basis with inputs which will ideally ensure your theses remain in a continual state of evolution. Inflation or deflation are not ideological positions which one "must maintain belief in" - they are merely an attempt to interpret present danger accurately in order to defend against it. Circumstances are in a permanent state of flux, so investment theses should evidence some change and "permeability from changing facts on the ground" over time as well.

I have seen Mr. Janszen's ideas here in a continual state of evolution in the past two years. For example, he has notably widened his views regarding the inputs to inflation, taking due note of many non-financial sources to that inflation (inputs from oil as well as inputs from fiat currency) which were not opinions much mentioned here 24 months ago. He has also openly questioned his own "ka-poom" thesis in terms of wondering whether the "ka" phase of deflation which was originally envisioned as the precursor to ramping inflation may have been bypassed entirely. In short, he finds it important to remain "agnostic". I have not seen you or Mish modify or broaden your ideas to incorporate ANY inflationary inputs which are occurring worldwide. Quite aside from whether the US is or is not experiencing inflation, it is manifestly clear that a large portion of the rest of the world IS experiencing it, no? (We invite your acknowledgement of that fact!!) Your resolute omission of the fact that half the world is indeed experiencing inflation from any part of your analyses suggests that you may feel that permitting even a small fraction of this data to creep into your macro thesis is regarded as a mortal peril - as though it would fatally infect your macro deflationist view. Indeed it would - as it would then be your task to explain how the US, the world's lynchpin economy until now, could be experiencing massive deflation (as you suggest) while the rest of the world could be experiencing massive inflation, as Doug Noland so painstakingly maps out each and every week.

The term "stringently agnostic" is not one that comes readily to mind, when viewing the net contributions of "deflationista" analysts in this decade. They are being pressed on all sides by an avalanche of data points, by an entire world full of data inimical to their views. Find the time to digest Mr. Noland's data below Mr. Ackerman - and then take due note whether any scrap of this information is permitted to enter into your macro-world picture. If not, there may be a problem with "hermetic viewpoints".

____________________

Commodities Watch:

June 24 – Bloomberg (Stewart Bailey and Dale Crofts): “ArcelorMittal Chief Executive Officer Lakshmi Mittal said the world may be facing its first steel shortage in decades because of accelerating demand and a lack of investment… ‘There is short supply; all steel companies are running at full capacity,’ he said… ‘We’re facing for the first time in decades a potential shortage of steel.’ Steel prices have surged as emerging markets including India and China build more bridges and houses and their increasingly affluent populations buy more cars and appliances… Hot-rolled steel sheet… climbed to an average $1,020 a ton in the U.S. in May from $850 in April… Prices have gained 76% since January and are about 86% higher than a year ago.”

June 24 – Financial Times (Javier Blas and Rebecca Bream): “Global inflation fears deepened as Chinese steelmakers agreed to a record increase in annual iron ore prices in a move likely to boost the cost of cars, machinery and other products. Chinese millers agreed to pay Anglo-Australian miner Rio Tinto up to 96.5% more for their ore supplies this year, the largest ever annual increase… The rise – an average 85% – surpasses the record increase of 71.5% agreed in 2005…”

June 27 – Bloomberg (Feiwen Rong and Aya Takada): “Natural rubber futures in Tokyo climbed to the highest in 28 years as crude oil surged to a record for a second day, boosting production costs for the alternative synthetic product used to make car tires.”
June 23 – Bloomberg (Yuriy Humber): “The uranium industry’s worst year is about to collide with a nuclear construction program in India and China that rivals the ones undertaken during the oil crisis of the 1970s. The result is likely to be a 58% rebound in uranium to $90 a pound from $57 now, according to Goldman Sachs JBWere Pty and Rio Tinto Group… Uranium plunged 57% in the past year…”

Gold rose 2.9% to a one-month high $928, and Silver 1.2% to $17.71. July Crude jumped $4.85 to a record $140.21. July Gasoline gained 1.8% (up 41% y-t-d), and July Natural Gas added 0.6% (up 76% y-t-d). July Copper gained 1.2%. July Wheat rose 3.3% and Corn 4.4%. The CRB index increased 2.0% to a new record high (up 29.5% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 2.8% to a new record (up 42% y-t-d and 77% y-o-y).


Global Inflation Turmoil Watch:

June 25 – Financial Times (Francesco Guerrera, Krishna Guha and Javier Blas): “The spectre of inflation returned to haunt the global economy on Tuesday as companies ranging from Dow Chemical of the US to South Korea’s Posco unveiled sharp price rises to combat the soaring cost of energy and raw materials. The moves by Dow, the biggest chemical group in the US, and Posco, the world’s fourth largest steelmaker, came as Charles Holliday, chief executive of… DuPont, warned of rising inflationary pressures… ‘Inflation is here big time,’ Mr Holliday told the Financial Times, adding that companies such as DuPont faced ‘tremendous cost pressures’ and had the ‘obligation’ to raise their prices to offset higher costs.’”

June 27 – Financial Times (Jonathan Birchall): “Soaring energy prices are forcing Procter & Gamble, the US consumer goods company that is the world’s biggest, to rethink how it distributes products and to consider shifting manufacturing sites closer to consumers to cut its transport bill. Keith Harrison, head of global supply at P&G… said the era of high oil prices was forcing P&G to change. ‘A lot of our supply chain design work was really developed and implemented in the 1980s and 1990s, when our capital spending was fairly high as a cost of capacity and oil was 10 bucks a barrel… I could say that the supply chain design is now upside down. The environment has changed… Transportation cost is going to create an even more distributed sourcing network than we would have had otherwise.’”

June 26 – Financial Times (Raphael Minder): “South Korean authorities yesterday sold as much as $1bn to shore up the won… underlining concerns in several Asian countries about weakening currencies in the face of oil-fuelled inflation… The government ‘hopes the foreign currency trend will not interfere with stable prices’, Choi Jong-ku, head of the finance ministry’s international finance bureau… said… South Korea’s predicament is shared by other Asian nations that have seen an abrupt currency reversal compound inflationary pressures…”

June 26 – Bloomberg (Beth Thomas and Shamim Adam): “Vietnam’s consumer prices accelerated for a 16th month in June… Consumer prices gained 26.8% from a year earlier, the biggest jump since at least 1992…”


Unbalanced Global Economy Watch:

June 26 – MarketNews International): “Contrary to most forecasts, eurozone M3 money supply growth did not slow in May after a pick-up to 10.5% in April, remaining at a rapid double-digit annual pace for the 18th month in a row… Growth of loans to the private sector slowed for the fifth-straight month to 10.4% while remaining over 10% for the last two years.

June 26 – Bloomberg (Jurjen van de Pol and Meera Louis): “Inflation in Belgium accelerated to the fastest in more than 23 years in June on surging energy prices. The inflation rate rose to 5.8%...”

June 25 – Bloomberg (Tasneem Brogger): “Denmark’s consumer confidence index slumped more than economists expected to the lowest since 1999 this month as inflation accelerated and borrowing costs rose.”

June 27 – Bloomberg (Ben Sills): “Spanish inflation accelerated to the fastest pace on record in June as oil and food prices surged. Consumer prices rose 5.1% from a year ago after increasing 4.7% in May…”

June 26 – Bloomberg (Tasneem Brogger): “Iceland’s inflation rate rose to 12.7% in June, more than five times the central bank's target, after a slump in the krona sent import prices surging, maintaining pressure on the central bank to raise interest rates. Inflation accelerated from 12.3% the month before…”

June 23 – Bloomberg (Alex Nicholson): “Russian retail sales growth unexpectedly accelerated to 14.6% in May from the slowest pace in almost a year and a half the month before.”

June 26 – AFP: “Nigeria’s inflation rate rose in May to 9.7% from 8.2% in April, driven by increases in the cost of food and household items…”

June 24 – Bloomberg (Jason McLure): “Ethiopia’s annual inflation rate surged to 39.1% in May as food and fuel costs increased, the Central Statistical Agency said. Inflation accelerated from 29.6% in April…”

June 25 – Bloomberg (Nasreen Seria and Mike Cohen): “South African inflation accelerated to an annual 10.9% in May…”


Bursting Bubble Economy Watch:

June 24 – Bloomberg (Kevin Orland): “Dow Chemical Co., the largest U.S. chemical maker, said surging costs for energy and raw materials to make Styrofoam, pesticides and plastics are forcing the company to raise prices by as much as 25% in July. In addition to the price increases, freight surcharges of $300 per truck shipment and $600 per rail shipment will become effective Aug. 1… Chief Executive Officer Andrew Liveris last month raised prices for June by 20%, the biggest boost in the company’s 111-year history… The additional increases were needed because of a ‘relentless’ rise in the cost of energy and hydrocarbon materials, Dow said. ‘The staggering increase in our costs over the past few months have forced us to take these further measures in order to restore our margins,’ Liveris said…”

June 23 – Bloomberg (Rich Miller): “What’s good news for U.S. businesses may turn out to be bad news for Federal Reserve Chairman Ben S. Bernanke’s fight against inflation. The surging oil prices that are raising exporters’ costs to ship everything from steel to sofas to America are encouraging customers to buy more domestically made goods -- and giving the producers of those goods more room to raise their prices. The result: As Bernanke and fellow policy makers meet in Washington this week, they may find themselves starting to lose the benefit of the flow of inexpensive imports the chairman cited in a June 3 speech as a key force holding down living costs. ‘It’s changing global costs,’ says Jeffrey Rubin, chief economist at CIBC World Markets… ‘It’s a huge inflationary threat.’”

Jim Nickerson
06-28-08, 01:16 PM
I don't know that this "argument" or the concerns for deflation is going to soon disappear.

From John Mauldin's Weekly E-Letter, check http://www.safehaven.com/ later to likely find the entire article.



Now, let me offer a hypothetical series of events which could alter the current environment and maybe even bring back the specter of deflation.

The US trade deficit is roughly where it has been for four years, running in the neighborhood of 6% of GDP. Only a few years ago, less than 30% of that was for oil. Now, that has changed. Roughly 60% of our trade deficit is spent on oil, much of it sadly going to countries that are not necessarily our friends.

The US consumer has cut his spending on non-oil items by almost 40% in terms of GDP over the past few years, and the trend is clearly down every quarter.

Financial assets are clearly deflating. Banks are cutting leverage as aggressively as they once expanded their balance sheets. Even though the data shows that bank assets (lending) are increasing, it is because they are being forced to take assets that have been off the balance sheet and put them on the balance sheet. That trend in the data is going to reverse, and with a vengeance. [JN: if that observation is correct, doesn't it refute any data interpretation that money supply or credit creation are stoking inflation?]

We are also watching home values decline, not just here but in the United Kingdom and soon to be so in a lot of Europe, which will put European banks under even more pressure. That is serious wealth deflation.

I have been pounding the table for over a year that financial stocks are going to continue to show losses for at least through the end of this year. Dividends will be cut. More shares will be sold and further dilution will be a fact for many banks both in the US and in Europe. Trying to pick the bottom in the financial stocks is like catching a falling anvil.

And their distress is going to translate into distress for businesses and individuals who need to borrow money. All of this is deflationary. It is a strange world indeed in which we are in the middle of two bubbles bursting and for inflation to be the headline topic of every financial medium.

The source of the inflation is clear. One is rising food costs. World demand for grain is growing at 1.2% a year, yet yield increases are growing at 1.1% a year. The developed world, both the US and Europe, uses a lot of food for bio-fuels. The major areas where we could increase production are areas like Africa where the infrastructure and production methods are poor.

Everyone now believes that food costs are going to go up, energy will continue to rise and the dollar will continue to fall. And maybe all these trends continue. But let me offer a very contrarian thought or two.
Farmers around the world are going to respond to high food prices and by this time next year we could see a rise in supply that more meets the rise in demand. Prices might begin to actually fall.

Energy prices have risen so much that demand destruction is beginning to happen. US drivers are using less gas, and as Asia takes away its subsidies demand will fall as well. You could see oil prices drop over the next year.

And if oil prices drop, that means the US is shipping less of our dollars offshore, which slows the growth of available dollars, raises the price of the dollar which further lowers the cost of commodities.

In a world of decreased leverage, debt and housing deflation, coupled with lower food and energy costs and a higher dollar, it is possible that inflation drops below 2% by this time next year. Maybe more.

Far-fetched? Maybe. But it is a possibility that few are considering. In the inflationary commodity boom of the 70's, there was a 30% correction, which most don't remember. Everyone was convinced that commodity prices could only go one way. And we do not have the wage pressures and inflation that we did in the 70s.

The cure for high prices is high prices. High prices stimulate production and reduce demand. I see no reason that this could not happen again. Over time, I am along term commodity bull. I think oil could indeed go to $200 or more in the next decade, and as a developing world increases its need for commodities of all types, I see growing demand and prices. But that is then long term.

Stagflation on a world wide basis is going to have an effect on demand in the short term. I would be cautious about long only commodity funds. While I do not expect anything to change abruptly, I would be more vigilant and recognize that trends which look so good now can change. I am not suggesting that you get out, just pay attention to supply and demand figures coming out of the developing world.

Five years ago everyone was worried about deflation. A lot can happen in a short time. Ben Bernanke may be dusting off his helicopter speech in a few years, as deflation once again becomes the concern.
[BOLD EMPHASIS JN]

Jim Nickerson
06-30-08, 12:03 AM
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/30/cnbis130.xml

Global economy faces deep slowdown, warns central bankers' club

By Edmund Conway, Economics Editor

Last Updated: 1:19am BST 30/06/2008

<!--NO VIEW-->


The global economy may be heading for a far deeper crisis than is expected and a bout of deflation in the world's biggest economies is now a possibility, according to one of the world's most highly regarded economic institutions.

The Bank for International Settlements has warned that many in the City and elsewhere may have underestimated the scale of the coming economic downturn in one of its most sombre portraits yet of the international financial system.

The Swiss institution - known as the central bankers' bank - issued the alert in its annual report, released today.

It warned that the sub-prime crisis in financial markets was merely a reflection of growing debt burdens in the developed world, which could soon contribute to a deep slowdown.

The financial crisis in full (http://www.telegraph.co.uk/money/main.jhtml?menuId=242&menuItemId=10359&view=HEADLINESUMMARY&grid=F7&targetRule=14) "The difficulties in the sub-prime market were a trigger for, rather than a cause of, all the disruptive events that have followed," it said. "Moreover... the magnitude of the problems yet to be faced could be much greater than many now perceive.

The warning will cause particular concern among participants in the financial sector, as the BIS was among the earliest major institutions to warn that the world could face a credit crisis and financial slump.
The report draws stark comparisons between the current crisis and a variety of others including the Great Depression.

It said: "Historians would recall the long recession beginning in 1873, the global downturn that began in the late 1920s, and the Japanese and Asian crises of the early and late 1990s respectively.

" In each episode, a long period of strong credit growth coincided with an increasingly euphoric upturn in both the real economy and financial markets, followed by an unexpected crisis and extended downturn.

"In virtually every instance, some form of new economic discovery or new financial development provided a further 'new era' justification for rapid credit expansion, and predictably became a focus for blame in the downturn."

More on economics (http://www.telegraph.co.uk/money/main.jhtml?menuId=242&menuItemId=10280&view=HEADLINESUMMARY2&grid=F7&targetRule=14)

Most sobering is the report's warning that developed economies including the US and Britain could face deflation.

It said: "The eventual global slowdown could prove to be much greater and longer lasting than would be required to keep inflation under control. This could potentially even lead to deflation, which would evidently be less welcome."

Profitability in financial services is falling at its fastest rate in at least 19 years as the credit crisis continues to hurt, a new study indicates. A balance of 44pc of firms have reported a fall in profits in the quarterly financial services survey released today by the CBI and PricewaterhouseCoopers. It is the worst result since the survey began in 1989.


This deflation issue just does not seem to die out.

Jim Nickerson
06-30-08, 12:17 AM
And here is some more regarding the BIS's comments by the departing chief economist: Dr. Bill White. He has nothing good to allow for Alan Greasepan

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/30/ccbis130.xml


BIS renews slump fears as global economy pays the price

Last Updated: 1:19am BST 30/06/2008

The central bankers' bank renews fear of second depression, writes Ambrose Evans-Pritchard



A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate.
The venerable body, the ultimate bank of central bankers, said years of loose monetary policy had fuelled a dangerous credit bubble that would entail "much higher costs than is commonly supposed".

In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to "clean up" once property bubbles have burst.
If only we had all listened to the BIS a long time ago. Ensconced in its Swiss lair, it has fired off anathemas for years, struggling to uphold orthodoxy against the follies of modern central banking.

Bill White, the departing chief economist, has now penned his swansong, the BIS's 78th Annual Report, released today. It is a disconcerting read for those who want to hope the global crisis is over.

"The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point," it said.

"These fears are not groundless. The magnitude of the problems yet to be faced could be much greater than many now perceive," it said. "It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."

Given the constraints under which the BIS must operate, this amounts to a warning that monetary overkill by the Fed, the Bank of England, and above all the European Central Bank could prove dangerous at this juncture.

More on banking (http://www.telegraph.co.uk/money/main.jhtml?menuId=242&menuItemId=10277&view=HEADLINESUMMARY2&grid=F7&targetRule=14)

European banks have suffered worse losses on US property than American banks. Their net dollar liabilities are $900bn, mostly short-term loans that have to be rolled over, a costly business with spreads still near panic levels. Mortgage and consumer credit has "demonstrably worsened".

The BIS cautions the ECB to handle its lending data with great care. "The statistics may understate the contraction in the supply of credit," it said.
The death of securitisation has forced banks to bring portfolios back on to their balance sheets, while firms in need are drawing down pre-arranged credit lines. This is a far cry from a lending recovery.

Warning signs are flashing across Eastern Europe (ex-Russia) where short-term foreign debt is 120pc of reserves, mostly in euros and Swiss francs. Current account deficits are 14.6pc of GDP.

"They could find it difficult to secure foreign funding if global financing conditions were to tighten more severely," it said. Swedish, Austrian and Italian banks have drawn on wholesale markets to lend heavily to subsidiaries across the region. This could "dry up".

China is not immune, although the BIS has dropped last year's comment that growth is "unstable, unbalanced, unco-ordinated and unsustainable".
The US accounts for 20pc of China's exports, but that does not capture the inter-links across Asia that ultimately depend on US shopping malls. "There is a risk that China's imports overall could slow down sharply should the US economy weaken further," it said.

More on economics (http://www.telegraph.co.uk/money/main.jhtml?menuId=242&menuItemId=10280&view=HEADLINESUMMARY2&grid=F7&targetRule=14)

Global banks - with loans of $37 trillion in 2007, or 70pc of world GDP - are still in the eye of the storm.

"Inter-bank money markets have failed to recover. Of greatest concern at the moment is that still tighter credit conditions will be imposed on non-financial borrowers.

"In a number of countries, commercial property prices are beginning to soften, traditionally bad news for lenders. These real-financial interactions are potentially both complex and dangerous," it said.

Do not count on a fiscal rescue. "Explicit and implicit debts of governments are already so high as to raise doubts about whether all non-contractual commitments will be fully honoured."

Dr White says the US sub-prime crisis was the "trigger", not the cause of the disaster. This is not to exonerate the debt-brokers. "It cannot be denied that the originate-to-distribute model (CDOs, CLOs, etc) has had calamitous side-effects. Loans of increasingly poor quality have been made and then sold to the gullible and the greedy," he said.

Nor does it exonerate the watchdogs. "How could such a huge shadow banking system emerge without provoking clear statements of official concern?"

But there have always been excesses in booms. What has made this so bad is that governments set the price of money too low, enticing the banks into self-destruction.

"The fundamental cause of today's emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low," he said.

The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning.

They could get away with this as long as cheap goods from Asia kept a cap on inflation. It seduced them into letting asset booms get out of hand. This is where the central banks made their colossal blunder.

"Policymakers interpreted the quiescence in inflation to mean that there was no good reason to raise rates when growth accelerated, and no impediment to lowering them when growth faltered," said the report.
After almost two decades of this experiment - more or less the Greenspan years - the game is over. Debt has reached extreme levels, and now inflation has come back to life.

The easy trade-off has metamorphosed into a vicious trade-off. This was utterly predictable, and was indeed forecast by the BIS, which plaintively suggested in this report that central banks might like to think of an "exit strategy" next time they try such ploys.

In effect, this is an indictment of rigid inflation targets (such as Britain's), which prevent central banks from launching a pre-emptive strike against asset bubbles. In the 1990s, they should have torn up the rule-book and let inflation turn negative in light of the Asia effect.

The BIS suggests that a mix of "systemic indicators" should be used. The crucial objective is to slow credit growth and make sure that the punchbowl is taken away before the drunks run riot. "We need policy measures to lean against credit-drive excess," it said.

If there are going to be more bail-outs on both sides of the Atlantic - as there will be - the "socialised risks" should be taken on by political systems, and not dumped on the books of central banks.

"Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

"To deny this through the use of gimmicks and palliatives will only make things worse in the end," he said.
Let us all cheer Dr White off the stage.

Jim Nickerson
06-30-08, 01:41 AM
How about a "booster-shot" of Hyperinflationary Depression"?

http://www.bloomberg.com/avp/avp.htm?N=av&T=Hennecke%20Says%20U.S.%20Faces%20'Hyperinflation ary%20Depression'&clipSRC=mms://media2.bloomberg.com/cache/vVkI8WexWY2M.asf

This is a 5 minute video from early Monday morning.

Hennecke Says U.S. Faces 'Hyperinflationary Depression'

Charles Mackay
06-30-08, 11:04 AM
And here is some more regarding the BIS's comments by the departing chief economist: Dr. Bill White. He has nothing good to allow for Alan Greasepan

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/30/ccbis130.xml


Jim, I've read all these latest pronouncements by Barclays, RBS, BIS etc. and have been trying to figure out just what it all means. I understand that BIS came out a few months before the Sub Prime crisis in 2007 with warnings and a recommendation to buy the Yen in a carry trade unwind. They in effect announced the August crisis in advance.

It appears to be quite a pissing contest.. apparently Europe has been stuck with a trillion in bad paper passed off by the US banking con artists. The article said they'd already written off 800 billion $.

They also are not willing to follow the US down a hyper inflationary path and in no uncertain terms have broadcast that they will do the right thing and raise rates to arrest the inflationary spiral that we are now in. They know they have the US in between a rock and a hard place and are going to squeeze us hard.

I think this is a huge story and probably THEE "great game" to follow right now. It's Robert Zoellick, Paul Wolfowitz, and Ben Bernanke (The IMF, the World Bank, and the FED) against the EURO and the BIS.

GRG55
06-30-08, 09:24 PM
...They also are not willing to follow the US down a hyper inflationary path and in no uncertain terms have broadcast that they will do the right thing and raise rates to arrest the inflationary spiral that we are now in. They know they have the US in between a rock and a hard place and are going to squeeze us hard.



Methinks the ECB is getting too much credit. Far too much credit.

Do you really think the ECB tweaking its administered rate upward [and that is nowhere near certain yet] is going to do anything material to deal with, or protect Europeans from, the inflation that stalks the planet?

Has the ECB really been any less profligate than numerous other Central Banks? Or does it look good only in comparison with the Fed?




http://newsimg.bbc.co.uk/shared/img/toolbar_logo.gif (http://www.bbc.co.uk/go/toolbar/i/-/home/i/)
Last Updated: Tuesday, 18 December 2007, 23:16 GMT
ECB lends $500bn to lower rates

The European Central Bank has allocated 348.7bn euros ($502bn; £249bn) to banks at a below-market rate in a refinancing move to ease tightened credit markets.

It is one of five central banks that have injected billions in emergency cash into money markets...

...The two-week ECB refinancing operation is the first time it has said it would offer banks unlimited funds, above a certain interest rate, since 9 August when the credit crisis started...

...The size of the offer surprised some analysts. "The sheer magnitude of the operation caught the market off guard," said Win Thin, a senior currency strategist at Brown Brothers Harriman...
http://news.bbc.co.uk/2/hi/business/7149329.stm

Charles Mackay
06-30-08, 09:45 PM
Methinks the ECB is getting too much credit. Far too much credit.

Do you really think the ECB tweaking its administered rate upward [and that is nowhere near certain yet] is going to do anything material to deal with, or protect Europeans from, the inflation that stalks the planet?

Not as much as gold is! :D. You're right, just in comparison with the corrupt FED they are.

I see tonight that Goldman has followed with a left jab.. recommending shorting European stocks "in case of a crash" :p

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahmkboBVHNeg&refer=home

bart
06-30-08, 09:45 PM
Methinks the ECB is getting too much credit. Far too much credit.


Indeed. Better than the US - yes. Much better - no way.

Their M3 bottomed in mid 2004 at about 5% growth rate and probably peaked at over 12% last September.

Their credit creation (MFI) numbers are also similar and similar to the US - a bottom in early 2003 at about 2.5% annual growth rate, and a likely peak in Jan 2008 at about 11% growth rate.

I also have a blue light special on some ocean front property in Idaho for anyone who believes their CPI is being correctly reported at under 4%.

There's this too:
Europe’s Ailing Social Model: Facts & Fairy-Tales (http://www.brusselsjournal.com/node/933)

Charles Mackay
06-30-08, 11:03 PM
Indeed. Better than the US - yes. Much better - no way.



I think the war of words that is developing is the most interesting aspect of this rash of articles. On the other hand, the U.S. collapsed interest rates to 2% with inflation at over 7% (according to John Williams) so the ECU is definitely protecting it's currency better than the Fed. That really cannot be questioned, although I certainly agree that they don't hold a candle to the protection of real money.

bart
06-30-08, 11:52 PM
I think the war of words that is developing is the most interesting aspect of this rash of articles. On the other hand, the U.S. collapsed interest rates to 2% with inflation at over 7% (according to John Williams) so the ECU is definitely protecting it's currency better than the Fed. That really cannot be questioned, although I certainly agree that they don't hold a candle to the protection of real money.

Truth, and it's just all part of the "game".

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


In other words, it appears that we agree that the competitive devaluation and tariff etc. games gets fought in financial and war-of-words areas too.


That 7% number you noted from John Williams is only adjusting per the pre Clinton methodology. The full correction when the 1982 methodology is used is running around 11.5%.

The ECU is indeed protecting their currency a little better, but also do take into account:


Their yield curve was inverted for almost the full first half of 2007 and its a reasonably good predictor of a future recession.
Their current 10 year bond is at 4.03%, almost identical to the US 10 year TNote.
Their current 3 month eurodollar rate is 3%, only about 1.2% higher than the US 3 month TBill.
They say their CPI is only 3.7% in the most recent data I have, but some incomplete research I'm doing shows is to be at least 6.2-6.8% and probably higher - perhaps as much as 8.5-9.5%. To state it another way, their interest rates are negative too.
Their GDP growth rate has been falling rapidly since early to mid 2007 and per the last report is only about 2.5%.

Jim Nickerson
07-01-08, 12:27 AM
Here's a bit more, and it looks to me the ECB is serious.

"Jean-Claude Trichet, the bank's president, has warned of an "acute risk" of a wage-price spiral unless inflation is wrung out of the system."

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/01/ccecb101.xml

Stagflation grips Eurozone as interest rates look set to rise

By Ambrose Evans-Pritchard, International Business Editor

Last Updated: 1:20am BST 01/07/2008

<!--NO VIEW-->


Eurozone inflation surged to an all-time high of 4pc in June despite worrying signs of a slump in manufacturing, confronting the European Central Bank with the toughest challenge since its creation a decade ago.

Soaring oil and food prices guarantee a quarter-point rise in interest rates to 4.25pc on Thursday, further widening the gulf in rates between Europe and America.

The only question is whether the ECB opts for a "one-and-done" move or sets the course for yet more rises in the autumn.

Jean-Claude Trichet, the bank's president, has warned of an "acute risk" of a wage-price spiral unless inflation is wrung out of the system.

But a growing chorus of critics fears that overkill could tip the eurozone into a severe downturn at this delicate juncture, and risk a dangerous chain of political events in southern Europe and Ireland - where voters have already thrown the EU into chaos by rejecting the Lisbon Treaty.

The Irish economy contracted at a rate of 1.5pc in the first quarter and is now facing the worst recession since the crash of the mid-1980s. Investment fell 19.1pc. House prices have now fallen for 15 months in a row.

Spanish premier Jose Luis Zapatero was forced to reassure his nation's media this weekend that he was still on speaking terms with his finance minister Pedro Solbes, who has refused to endorse the government's economic crisis plan.

Both Mr Zapatero and Italy's Silvio Berlusconi have lashed out at the ECB in recent days, but even Germany's finance minister Peer Steinbrück has begun to question Frankfurt's hard-line policy.

"An interest rate increase could have a pro-cyclical impact at a point when the economy is slowing down," he said.

The comments come after five months of falling orders in Germany, the worst run since the early 1990s. Siemens, Volkswagen and other big industrial exporters have begun to cut jobs.The ECB has held rates steady at 4pc since the credit crunch began last summer, even though Euribor lending rates have jumped 120 basis points. The euro has rocketed against the dollar, sterling, yen and yuan.

The full effects of the monetary and currency squeeze will feed through the eurozone over the next year or so. There is a risk that the impact could hit just as the global economy slows sharply.

France's finance minister, Christine Lagarde, praised the apparent policy shift in Berlin. "For the first time my German colleague, who was resolutely determined to back the ECB whatever it does, is telling Mr Trichet, 'Be careful'.

"There is more than one indicator. There is inflation, certainly, but there is also growth. Quite a few of us would like Mr Trichet to keep his eye on both barometers. Until now he has had only inflation on his radar," she said.

Her choice of words is significant. EU ministers have the ultimate power - under Maastricht Article 109 - to shape the eurozone exchange rate, giving them a backdoor means of forcing a change in the ECB's policy. The implicit threat to invoke this clause is a warning to ECB hawks that independence has limits.

The remarks by Paris and Berlin come as US Treasury Secretary Hank Paulson prepares to visit both Mr Trichet and Bundesbank chief Axel Weber today. The Bush administration is reportedly furious with the ECB for undercutting US efforts to stabilise the dollar and halt the oil spike in very dangerous circumstances.

The ECB is playing with fire, forcing the US to pursue a more restrictive monetary policy than it might think safe at a time when the financial system is already in dire trouble. The dispute has echoes of the Transatlantic rift before the stock market crash in October 1987.
Oil jumped $16 a barrel in two days earlier this month on the back of a rising euro after Mr Trichet signalled an ECB rate rise. The market response was a prize exhibit for those who argue that hedge funds have now run amok on the oil markets, using crude futures as a sort of "anti-dollar" currency - with multiple leverage.

It also revealed that ECB tightening in this environment is counter-productive since it pushes inflation even higher. Critics say the bank is chasing its own tail, failing to adapt to the complexities of the modern global economy.

Stephen Lewis, chief strategist at Insinger de Beaufort, said the ECB is right to raise rates, despite the risks. "If they were to back off now after signalling a rise it would cause a catastrophic loss of credibility that would further harm global stability," he said.

"The bank cannot formulate policy on the basis that this might be a short-term price spike. It would destroy consumer confidence and blast economic growth prospects if it lets inflation run ahead."

bart
07-01-08, 12:48 AM
Here's a bit more, and it looks to me the ECB is serious.

"Jean-Claude Trichet, the bank's president, has warned of an "acute risk" of a wage-price spiral unless inflation is wrung out of the system."


They may very well raise and they do seem a bit less profligate than the Fed, but talking about only a 1/4 point raise in the context of wringing inflation out of the Euro area doesn't strike me as being highly comparable data points.

Jim Nickerson
07-01-08, 12:53 AM
http://www.safehaven.com/article-10652.htm

Who's that knocking at my door and shouting "deflation"? Would you guess, Mike Shedlock.

Snips.


We had a crack-up-boom. What else can you call the financial engineering that went with SIVs, Conduits, Toggle Bonds, Covenant Lite loans, Pay Option ARMs, etc., etc? That crack-up-boom is over. And just like every credit boom in history, the backside, once the credit boom ends is deflation. Previous examples include Tulip Mania, the South Sea Bubble, John Law Mississippi scheme, the Great Depression, and the property bust in Japan.
.
.
The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none. History is about to repeat.


Edit: and the article at safehaven.com above Shedlock's is titled "We have Inflation not Deflation." http://www.safehaven.com/article-10653.htm I post that link without having read a word of the article. My attitude about this whole issue is becoming as the student who was asked, "What is the difference between ignorance and apathy"? To which he replied, "I don't know and I don't care."

For myself I am not convinced anyone knows how things will be in months, years, or a decade. For my own money, I have a bit toward inflation and a bit toward deflation. However it turns out between now and whatever is finally the answer, I hope to play the trends which is no easier than playing whatever one sees as the best long-term bet.

FRED
07-01-08, 11:41 AM
http://www.safehaven.com/article-10652.htm

Who's that knocking at my door and shouting "deflation"? Would you guess, Mike Shedlock.

Snips.


Edit: and the article at safehaven.com above Shedlock's is titled "We have Inflation not Deflation." http://www.safehaven.com/article-10653.htm I post that link without having read a word of the article. My attitude about this whole issue is becoming as the student who was asked, "What is the difference between ignorance and apathy"? To which he replied, "I don't know and I don't care."

For myself I am not convinced anyone knows how things will be in months, years, or a decade. For my own money, I have a bit toward inflation and a bit toward deflation. However it turns out between now and whatever is finally the answer, I hope to play the trends which is no easier than playing whatever one sees as the best long-term bet.

EJ writes in:

We told readers August 2001 that inflation was coming as a result of the political response to the collapse of the tech bubble. At the time the Fed was waving its hands around warning about deflation as were 99% of MSM and "contrarian" commentators, thus all the cheap gold, silver, and platinum that could be picked up for what today seem like absurd prices. If you were here at the time and were inclined to act on the call, you bought PMs and are up 300% or more. We did. My 15% position is now up more than 300%.

Likewise the bear market calls in March 2000 and December 2007 helped readers inclined to short the indexes make a few bucks, but in any case helped, as near as we can tell from the hundreds of emails we received, many thousands of readers to avoid the evaporation of wealth of anyone holding on through the NASDAQ correction which, I will remind readers, is still trading 50% below its peak.

The reason our track record is good is that we never, ever play to our audience. We do not answer serious questions about the money system with platitudes like "gold is honest money." We are interested in the functioning of the Political Economy. Sterile economic models tell us little. Charts tell us only where we have been, and are especially useful in showing the relationships between factors, but only as they occurred in the past. They help us ask the right questions.

Forecasting is an art, not a science. Frustration and bewilderment is there to greet anyone who hopes it to be a science.

Sometimes we are wrong, such as when we expected a period of disinflation to follow the collapse of the housing bubble. In the event we as certainly running into the period of credit contraction we expected, but with the Fed determined to keep interest rates above the zero bound by targeting money aggregates (see Zero Bound Diaries: Is Bernanke Volcker's Mirror Image? (http://itulip.com/forums/showthread.php?p=27332#post27332)), it appears that the result of this primary mission is a weak dollar and energy imports led inflation as far as the eye can see.

September 2006 I concluded that Ka-Poom in the post housing bubble period could not be traded (see No Deflation! Disinflation then Lots of Inflation). (http://www.itulip.com/forums/showthread.php?p=2795#post2795) This turned out to be the case.

Fast forward to June 2008. Now the BIS is warning of deflation (http://itulip.com/forums/showthread.php?t=4402):

The magnitude of the problems yet to be faced could be much greater than many now perceive," it said. "It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."
It is tempting to say, well, when the central bankers' central bank starts to warn about about deflation again, it's time to back up the truck to buy more PMs again, because the printing presses are about to go into hyperdrive.

But here is the crux of the issue. No two periods are ever alike. There is no existing model that represents the unusual set of antecedents that we see today. But one thing I can continue to assure readers of, that there are two ways to get poor after an economy goes into a serious post credit bubble downturn: 1) the price of things falls, but the number of monetary units you have in hand to use to buy them falls even more due to loss of income (deflation), and 2) the prices of things rises, but the number of monetary units you have in hand to pay for them does not rise as much (inflation). One is surely poorer in either case, but we are experiencing the second condition. Those who have predicted deflation ought to say, "Ok, you Inflation forecasters won Round One, but we are going to win Round Two!" That would be the honest approach.

We challenge anyone to explain to us how monetary units in existence, never mind any new ones that central banks may add to the system, can possibly appreciate in this environment, we are all ears. The Fed's hope that recession will cure the inflation it has created around the world is a bold wish given the pressures on world currency values due to many years of accommodative interest rates. We have alluded to many periods in the past when recession and inflation occurred simultaneously. Not in the US, but in other places at other times, to nations that had made a similar set of errors as the US has made. The BIS' fear that the credit crunch may snowball into a deflationary price spiral needs to be seen in the context of the central bankers' view of what "deflation" is. Further, if they can explain how monetary units that are decreasing in value relative to things can possibly buy more things, then we will consider how inflation may moderate or even reverse.

Charles Mackay
07-01-08, 11:56 AM
For myself I am not convinced anyone knows how things will be in months, years, or a decade. For my own money, I have a bit toward inflation and a bit toward deflation. However it turns out between now and whatever is finally the answer, I hope to play the trends which is no easier than playing whatever one sees as the best long-term bet.

Gold bullion is not only the BEST asset to own right now, it may be the ONLY asset to own ... The only one that will protect you from both inflation and deflation.

1) In the Great Depression the smart money moved out of industrials and into gold mining stocks. The stock price of gold mining companies soared relentlessly upward during the entire bear market. Homestake Mining rose continuously from $80 in October 1929 to $495 per share in December 1935 - which represents a total return of 519% (excluding cash dividends) during the most devastating part of the bear market. Obviously gold bullion's purchasing power rose tremendously also, regardless of FDR's boo boo.

2) On the other hand, if we go into an extended period of stagflation or even hyperinflation gold will be the best asset to own during that as well.

All hail gold bullion! ;)

Jay
07-01-08, 12:25 PM
EJ writes in:
We told readers August 2001 that inflation was coming as a result of the political response to the collapse of the tech bubble. At the time the Fed was waving its hands around warning about deflation as were 99% of MSM and "contrarian" commentators, thus all the cheap gold, silver, and platinum that could be picked up for what today seem like absurd prices. If you were here at the time and were inclined to act on the call, you bought PMs and are up 300% or more. We did. My 15% position is now up more than 300%.

Likewise the bear market calls in March 2000 and December 2007 helped readers inclined to short the indexes make a few bucks, but in any case helped, as near as we can tell from the hundreds of emails we received, many thousands of readers to avoid the evaporation of wealth of anyone holding on through the NASDAQ correction which, I will remind readers, is still trading 50% below its peak.

The reason our track record is good is that we never, ever play to our audience. We do not answer serious questions about the money system with platitudes like "gold is honest money." We are interested in the functioning of the Political Economy. Sterile economic models tell us little. Charts tell us only where we have been, and are especially useful in showing the relationships between factors, but only as they occurred in the past. They help us ask the right questions.

Forecasting is an art, not a science. Frustration and bewilderment is there to greet anyone who hopes it to be a science.

Sometimes we are wrong, such as when we expected a period of disinflation to follow the collapse of the housing bubble. In the event we as certainly running into the period of credit contraction we expected, but with the Fed determined to keep interest rates above the zero bound by targeting money aggregates (see Zero Bound Diaries: Is Bernanke Volcker's Mirror Image? (http://itulip.com/forums/showthread.php?p=27332#post27332)), it appears that the result of this primary mission is a weak dollar and energy imports led inflation as far as the eye can see.

September 2006 I concluded that Ka-Poom in the post housing bubble period could not be traded (see No Deflation! Disinflation then Lots of Inflation). (http://www.itulip.com/forums/showthread.php?p=2795#post2795) This turned out to be the case.

Fast forward to June 2008. Now the BIS is warning of deflation (http://itulip.com/forums/showthread.php?t=4402):
The magnitude of the problems yet to be faced could be much greater than many now perceive," it said. "It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."
It is tempting to say, well, when the central bankers' central bank starts to warn about about deflation again, it's time to back up the truck to buy more PMs again, because the printing presses are about to go into hyperdrive.

But here is the crux of the issue. No two periods are ever alike. There is no existing model that represents the unusual set of antecedents that we see today. But one thing I can continue to assure readers of, that there are two ways to get poor after an economy goes into a serious post credit bubble downturn: 1) the price of things falls, but the number of monetary units you have in hand to use to buy them falls even more due to loss of income (deflation), and 2) the prices of things rises, but the number of monetary units you have in hand to pay for them does not rise as much (inflation). One is surely poorer in either case, but we are experiencing the second condition. Those who have predicted deflation ought to say, "Ok, you Inflation forecasters won Round One, but we are going to win Round Two!" That would be the honest approach.

We challenge anyone to explain to us how monetary units in existence, never mind any new ones that central banks may add to the system, can possibly appreciate in this environment, we are all ears. The Fed's hope that recession will cure the inflation it has created around the world is a bold wish given the pressures on world currency values due to many years of accommodative interest rates. We have alluded to many periods in the past when recession and inflation occurred simultaneously. Not in the US, but in other places at other times, to nations that had made a similar set of errors as the US has made. The BIS' fear that the credit crunch may snowball into a deflationary price spiral needs to be seen in the context of the central bankers' view of what "deflation" is. Further, if they can explain how monetary units that are decreasing in value relative to things can possibly buy more things, then we will consider how inflation may moderate or even reverse.

EJ, I think I understand the broad itulip perspective for the most part, I have based a lot of financial decisions on what I have learned here and it has been profitable for me in many ways. However, while it is obvious that you and the inflationistas have "won round one" isn't it only a matter of Fed policy whether inflation continues? ASH brought this up in another excellent thread earlier.

I understand the argument that the Fed has telegraphed what it is going to do in advance right down to Bernanke's papers on the depression and his helicopter speech, and they have continued to follow that path right up to the present. But doesn't that make the deflation argument easy? Here it is in my limited understanding: the Fed reverses course, shocks everyone and hits the whammy button; closes the TAF, raises rates and heads for shelter. Are they going to do this, from what I have learned, mostly here, probably not, but they could and have done it in the past. Who is to say they don't have an ultimate plan that none of us have thought of, that involves capitalizing on a fiscal deflationary train wreck to make hard changes the system needs? Yes, I know it would hurt the very hand that feeds them, but really aren't they the one who feeds the hand? They could easily let the big, big players know in advance, who could take defensive actions, and clean up the pieces afterward. Too much tin foil?

jimmygu3
07-01-08, 12:34 PM
We challenge anyone to explain to us how monetary units in existence, never mind any new ones that central banks may add to the system, can possibly appreciate in this environment, we are all ears. [/COLOR]The Fed's hope that recession will cure the inflation it has created around the world is a bold wish given the pressures on world currency values due to many years of accommodative interest rates. We have alluded to many periods in the past when recession and inflation occurred simultaneously. Not in the US, but in other places at other times, to nations that had made a similar set of errors as the US has made. The BIS' fear that the credit crunch may snowball into a deflationary price spiral needs to be seen in the context of the central bankers' view of what "deflation" is. Further, if they can explain how monetary units that are decreasing in value relative to things can possibly buy more things, then we will consider how inflation may moderate or even reverse.
[/INDENT]

Playing Deflationista's Advocate...

Monetary units are expected to appreciate vs. houses due to the credit crunch. Rate hikes by the Fed could cause monetary units to appreciate vs PMs, the prices of which already have inflation expectations built in.

Jimmy

FRED
07-01-08, 12:42 PM
Playing Deflationista's Advocate...

Monetary units are expected to appreciate vs. houses due to the credit crunch. Rate hikes by the Fed could cause monetary units to appreciate vs PMs, the prices of which already have inflation expectations built in.

Jimmy

Obviously if the Fed raises rates, PMs will fall. Are deflationistas seriously expecting the Fed to commit fast political suicide by hiking rates during a credit crunch when it can die by slow, politically more expedient inflationary suicide instead?

That is the essence of Ka-Poom Theory, that governments always prefer slow suicide with the potential for recovery within the term of the current administration over the fast suicide with no chance of recovery.

Contemptuous
07-01-08, 12:44 PM
Aaron Krowne in fine form over at the Mortgage Lender Implode-O-Meter this week, chiming in and reiterating much of the iTulip theme on the inflation / deflation debate (whether he acknowledges it or not, he's "one of ours" now -and getting bleaker, too.):
______________________

To illustrate I'd like to ask my friend Mike "Mish" Shedlock (http://globaleconomicanalysis.blogspot.com/), who asserts that "we are in deflation," what he does when he pulls up to the gas station pump. Does he say "we are in deflation now -- just look how home prices are down about 20% from their mid-2006 peak. Therefore I demand you only charge me 80% of mid-2006 ($2.50/gallon) gas prices. So here is $2.00 for a gallon?" I don't think so. He probably intuitively senses that that wouldn't go over very well.
The basic reason this sort of Austrian "instant money quantity" reading is wrong is that plenty of money has already been created over the past 30 years, so there is really no need to "print" any more right now to get most of the bad effects!
______________________

So here you have deflationary causes producing dramatically inflationary effects. Seems counter-intuitive, but this is really nothing new: it is historically called the "flight to real goods", and it happens in every hyperinflation, ALONG WITH financial market collapse.

I believe what we are seeing here in oil, and to a great extent in most other basic commodities, is the FIRST EVER GLOBAL HYPERINFLATION. This is happening historically now and in such a big way because the dollar is the de facto reserve currency -- and the first-ever fiat global reserve currency -- so the Fed's actions are magnified beyond anything that has ever been seen before. They are also eclipsing the effect of the rest of the G7, which can't seem to decide if they will exercise restraint or provide cover for the Fed. They are basically puppets of the Fed (or have been -- there are signs of rebellion, especially from the ECB. I would say this rebellion is inevitable, and it will spread).

But interest rates in the West, if they do start going up by way of policy, probably will not go up fast enough to match the inflation they have already unleashed. And as long as the interest rates remain NEGATIVE in real terms (irrespective of manipulated CPI statistics), the problem will get worse. Hence the "hyper": continued negative real rates alongside collapsing paper money markets (along with supply and demand fundamentals) will keep the tailwinds on prices for essential commodities. Where else is the money going to go?
______________________

So I hope with the above I have convinced you at least that something new and hyperinflationary in nature is going on with oil prices. If by some miracle prices were to correct back to $100, not only would it likely be temporary, but extreme inflation would probably show up in some other commodity, or even (God forbid) precious metals. The need to preserve these trillions of wealth from ailing areas of the financial economy is not going away any time soon. It is going to get worse. In fact, if the authorities had any brains, they'd encourage investment in precious metals to divert immense pressure from food and energy. No one ever starved from gold skyrocketing in price; though it did end a political regime or two.
______________________

It is now getting so bad that the state and local governments are starting to appeal to the Federal government for help: major city mayors recently went to congress (http://www.cnn.com/2008/US/06/12/crumbling.cities.ap/index.html) to testify about their infrastructure and financial crises (the two are really the same problem) and beg for help. The latest housing bailout bill proposes billions to allow states to buy up foreclosed properties. And this is likely just the beginning.

But the problem is: the Federal government doesn't have any money. It's already deeply in the red, as we just discussed. They can only provide money if they can borrow it, which is bound to reach its limits soon. Where no limits are obeyed, there will be much more inflation, much faster. Any borrowing the Federal government can do above and beyond the states is really only backed by inflation (the ability to print more money to pay off the debt), but the world is beginning to question why bonds backed by little more than inflation should really be considered 'AAA'. That system didn't work so well in the US mortgage market.
______________________

My big worry at this point is that the US economy, for lack of a more euphonious wording, is headed for complete collapse due to failure of infrastructure as the coup de grace of financial stress. Now we will see how critical that mundane thing, so taken for granted, is to even have an economy in the first place. And of course, you can add lack of manufacturing capacity to our the list of infrastructure problems.

Previously I thought "severe recession", and then "depression" to describe what we face, but neither now seems to do the situation justice. An aspect of the trouble now beginning to figure prominently is the failure of American cities to function as laid out in their current form... because of the new factor of people simply not being able to afford to drive their cars (especially from home to work). Kunstler has been writing about this for years. In return he was considered a carnival side show; a sort of amusing angry little man off in his own little world. But now it looks like he was right.

A. Krowne.

FRED
07-01-08, 01:43 PM
Aaron Krowne in fine form over at the Mortgage Lender Implode-O-Meter this week, chiming in and reiterating much of the iTulip theme on the inflation / deflation debate (whether he acknowledges it or not, he's "one of ours" now -and getting bleaker, too.):
______________________

To illustrate I'd like to ask my friend Mike "Mish" Shedlock (http://globaleconomicanalysis.blogspot.com/), who asserts that "we are in deflation," what he does when he pulls up to the gas station pump. Does he say "we are in deflation now -- just look how home prices are down about 20% from their mid-2006 peak. Therefore I demand you only charge me 80% of mid-2006 ($2.50/gallon) gas prices. So here is $2.00 for a gallon?" I don't think so. He probably intuitively senses that that wouldn't go over very well.
The basic reason this sort of Austrian "instant money quantity" reading is wrong is that plenty of money has already been created over the past 30 years, so there is really no need to "print" any more right now to get most of the bad effects!
______________________

So here you have deflationary causes producing dramatically inflationary effects. Seems counter-intuitive, but this is really nothing new: it is historically called the "flight to real goods", and it happens in every hyperinflation, ALONG WITH financial market collapse.

I believe what we are seeing here in oil, and to a great extent in most other basic commodities, is the FIRST EVER GLOBAL HYPERINFLATION. This is happening historically now and in such a big way because the dollar is the de facto reserve currency -- and the first-ever fiat global reserve currency -- so the Fed's actions are magnified beyond anything that has ever been seen before. They are also eclipsing the effect of the rest of the G7, which can't seem to decide if they will exercise restraint or provide cover for the Fed. They are basically puppets of the Fed (or have been -- there are signs of rebellion, especially from the ECB. I would say this rebellion is inevitable, and it will spread).

But interest rates in the West, if they do start going up by way of policy, probably will not go up fast enough to match the inflation they have already unleashed. And as long as the interest rates remain NEGATIVE in real terms (irrespective of manipulated CPI statistics), the problem will get worse. Hence the "hyper": continued negative real rates alongside collapsing paper money markets (along with supply and demand fundamentals) will keep the tailwinds on prices for essential commodities. Where else is the money going to go?
______________________

So I hope with the above I have convinced you at least that something new and hyperinflationary in nature is going on with oil prices. If by some miracle prices were to correct back to $100, not only would it likely be temporary, but extreme inflation would probably show up in some other commodity, or even (God forbid) precious metals. The need to preserve these trillions of wealth from ailing areas of the financial economy is not going away any time soon. It is going to get worse. In fact, if the authorities had any brains, they'd encourage investment in precious metals to divert immense pressure from food and energy. No one ever starved from gold skyrocketing in price; though it did end a political regime or two.
______________________

It is now getting so bad that the state and local governments are starting to appeal to the Federal government for help: major city mayors recently went to congress (http://www.cnn.com/2008/US/06/12/crumbling.cities.ap/index.html) to testify about their infrastructure and financial crises (the two are really the same problem) and beg for help. The latest housing bailout bill proposes billions to allow states to buy up foreclosed properties. And this is likely just the beginning.

But the problem is: the Federal government doesn't have any money. It's already deeply in the red, as we just discussed. They can only provide money if they can borrow it, which is bound to reach its limits soon. Where no limits are obeyed, there will be much more inflation, much faster. Any borrowing the Federal government can do above and beyond the states is really only backed by inflation (the ability to print more money to pay off the debt), but the world is beginning to question why bonds backed by little more than inflation should really be considered 'AAA'. That system didn't work so well in the US mortgage market.
______________________

My big worry at this point is that the US economy, for lack of a more euphonious wording, is headed for complete collapse due to failure of infrastructure as the coup de grace of financial stress. Now we will see how critical that mundane thing, so taken for granted, is to even have an economy in the first place. And of course, you can add lack of manufacturing capacity to our the list of infrastructure problems.

Previously I thought "severe recession", and then "depression" to describe what we face, but neither now seems to do the situation justice. An aspect of the trouble now beginning to figure prominently is the failure of American cities to function as laid out in their current form... because of the new factor of people simply not being able to afford to drive their cars (especially from home to work). Kunstler has been writing about this for years. In return he was considered a carnival side show; a sort of amusing angry little man off in his own little world. But now it looks like he was right.

A. Krowne.

What I want to make sure I get across here, in case it's not obvious, is that I'm fairly certain that an unseemly economic turn of events is more likely to happen than not, probably in the next three years, and it's going to happen here, in the U.S. To us. To you and me. While it's likely to be worse than most of us are prepared for—that is, it will not be your average recession—it will not be the end of the world either, although there may be times when things look that way. It will certainly be the end of living high off the hog on other people's savings, and it will represent a transformation that we must go through to get to a different place.

Whether you experience the new place as better or not is going to depend on where you started and what's important to you. While periods of economic readjustment are never painless, it's important to keep in mind that the challenges we face as individuals represent nothing worse than those that 90% of the world's citizens cope with every day with grace, dignity, and humor. No one owes us a high standard of living, and most of the world gets by without one. Our main challenge will be to accept and deal with our problems effectively in the short term. It will require strong, honest leadership. In the long term, we can count on the United States' and its people's extraordinary ability to adapt to change and come out ahead.

- Eric Janszen, Inflation is Dead! Long Live Inflation! (Dec. 2005) (http://www.itulip.com/forums/showthread.php?p=2080#post2080)

c1ue
07-01-08, 02:27 PM
2006 standards of living:

United States:
44970

Poland:
8190

http://www.finfacts.ie/biz10/globalworldincomepercapita.htm

Euro/Dollar in 2006: about .77

2013 standards of living (in 2006 dollars) (growth rates net of inflation)

Scenario 1:

United States:
31404 (-5%/year for 7 years)

Poland:
19306 (+6%/year for 7 years) (Euro/dollar = .5)

Scenario 2:

United States:
22485 (100% inflation from 2008 to 2013, 0% net growth in 2007 & 2008)

Poland:
19306 (+6%/year for 7 years) (Euro/dollar = .5)

Still think the US winding up with a standard of living comparable to Poland is out of the question?

More importantly, do you now comprehend how inflation and/or dollar depreciation can rob you?

Charles Mackay
07-01-08, 02:42 PM
and yet another comment on the spat:

ECB Is From Mars, Fed Is From Venus, Deutsche Bank Says: Chart of the Day (http://www.bloomberg.com/apps/news?pid=20601109&sid=ak2YHFC_sK7E&refer=news) The European Central Bank and the Federal Reserve are reacting differently to the threat of faster inflation, with policy makers in Europe likely to backtrack after raising interest rates, according to Deutsche Bank AG economists.

raja
07-01-08, 03:50 PM
Obviously if the Fed raises rates, PMs will fall. Are deflationistas seriously expecting the Fed to commit fast political suicide by hiking rates during a credit crunch when it can die by slow, politically more expedient inflationary suicide instead?

That is the essence of Ka-Poom Theory, that governments always prefer slow suicide with the potential for recovery within the term of the current administration over the fast suicide with no chance of recovery.
I am a bit confused here . . . .

The way I understand it is that the US finances spending in large part by selling Treasuries. If the interest rates paid on Treasuries are not high compared to other investments, the government will have in increase those rates to induce buyers to invest.

So, it seems to me that, as inflation goes up, the rates on Treasury bill MUST rise.

If I've got that right, then it seems that as soon as inflation starts up in earnest, gold will have to go down (given that there is a time lag due to flight-to-safety buying).

So, perhaps you see how I'm confused . . . .
Inflation up, Treasury rates up, gold down.
Or perhaps the rates you mentioned above are not Treasury rates ???? :confused:

bart
07-01-08, 04:21 PM
From another board:



From Jens O. Parsson's "The Dying of Money (http://www.amazon.com/Dying-Money-Lessons-American-Inflations/dp/0914688014)"

Lessons of the Great German and American Inflations

“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money*, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of al traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”

*emphasis mine

This problem has happened before and will happen again (albeit, in a slightly diferent fashion) and yet again we will see vast inflation while at the same time (as Parsson show in his book) "tightness of money." That "tightness of money" occured during times of much infkation and yet, was not deflationary.

If the economy slows faster, than the supply of money, that's still an inflationary condition. More money chasing less goods.


Parsson's book is a good one.

Charles Mackay
07-01-08, 04:39 PM
From another board:
Parsson's book is a good one.

And a book that is hard to find! I finally found a copy a few years ago on Puplava's recommendation. One lesson I'll never forget is that the hyperinflation starts from money coming home. People abroad realize what is happening before the citizens of the hyperinflating country do. Bart, what is that latest stat that the government is now hiding? The treasury report that shows money coming home?

bart
07-01-08, 05:00 PM
And a book that is hard to find! I finally found a copy a few years ago on Puplava's recommendation. One lesson I'll never forget is that the hyperinflation starts from money coming home. People abroad realize what is happening before the citizens of the hyperinflating country do. Bart, what is that latest stat that the government is now hiding? The treasury report that shows money coming home?

There's a link in my original post but the book is quite pricey - over $240 used. :(

The most recent "hidden" stat is on the Fed's weekly public H.4.1 report. The boys have been lending securities in off balance sheet mode for almost 3 months, in the $100-$150 billion range. I'm still looking for an application, the interest rates are around 1-2%.

Charles Mackay
07-01-08, 05:42 PM
There's a link in my original post but the book is quite pricey - over $240 used. :(

The most recent "hidden" stat is on the Fed's weekly public H.4.1 report. The boys have been lending securities in off balance sheet mode for almost 3 months, in the $100-$150 billion range. I'm still looking for an application, the interest rates are around 1-2%.

OK, but what about these foreign investment numbers in the U.S. being discontinued?

http://worldnetdaily.com/index.php?fa=PAGE.view&pageId=66694

Rajiv
07-01-08, 06:05 PM
I will get "Dying of Money" from the library and put up the pdf if you are interested in it.

There was a very illuminating articel at Elaine Supkis' site

Martin Jr And The Destruction Of Gold Peg (http://elainemeinelsupkis.typepad.com/money_matters/2008/06/elaine-meine-16.html)


To be frank, going back into old Fed Reserve speeches, one is struck by both how similar today's problems are to past difficulties as well as how openly earlier Fed chiefs used to try to talk to Congress and the public. People thought Greenspan was very smart and clever because he talked in circles and made little rational sense. This supposedly made his many mysterious policies look difficult and thus, we had to trust him because he knew more than us little people. Well, that was a false front. Today, we go back to when I was born to see what Mc Chesney Martin Jr thought about Fed policies after WWII and during the Korean War. He is the Fed chief who shoved things to the bitter destruction of the gold standard and the devaluing of silver coinage.

First, let us introduce the longest-serving Fed Chief, a man born with a silver spoon in his mouth. The destroyer of the silver/gold basis of our currency was done by the hands of the son of one of the founders of the Federal Reserve at Jekkyl Island, Georgia, in 1913.

William McChesney Martin, Jr. (http://en.wikipedia.org/wiki/William_McChesney_Martin,_Jr.)
William McChesney Martin, Jr. (born December 17, 1906, St. Louis, Missouri – died July 28, 1998, Washington, D.C.) was the ninth and longest-serving Chairman of the United States Federal Reserve, serving from April 2, 1951 to January 31, 1970 under five Presidents. William McChesney Martin, Jr. was born to William McChesney Martin and Rebecca Woods. Martin's connection to the Federal Reserve was forged through his family heritage. In 1913, Martin's father was summoned by President Woodrow Wilson and Senator Carter Glass to help design the Federal Reserve Act that would establish the Federal Reserve System on December 23 that same year. His father later served as governor and then president of the Federal Reserve Bank of St. Louis.

Martin was a graduate of Yale University, where his formal education was in English and Latin rather than economics.
Ah, a family affair! The protean forces unleashed by daddy were completed by the son. McChesney Martin Jr. presided over the launching of the Cold War which was a perpetual war and coming in on the wings of the needs of Truman for waging the wasteful and dangerous Korean War, the need for more and more money on top of the huge debts generated by WWII....Martin Jr. had to fix this so the government could wage war while tricking the populace into thinking there was no wars. Thus, no war taxes, no more rations, no more sacrifices. From the ascension of the son onto the saddle of the War Horse, McChesney Martin Jr. was able to carry out his mission!

bart
07-01-08, 06:11 PM
OK, but what about these foreign investment numbers in the U.S. being discontinued?

http://worldnetdaily.com/index.php?fa=PAGE.view&pageId=66694

:D :D :D ... there's always at least one of youyr type in a crowd. :cool:

I was actually the one who referred Jerome Corsi (the author of that article) to John Williams after he interviewed me about my M3 reconstruction (that was published much earlier than John's ;) ).

And on the BEA ceasing publication and that web page recap, I was under the impression that it was still going. I'm also unaware of any other significant data or reports being dropped. Perhaps they've learned a lesson from the public outcry and of course from cantankerous folk like John Williams and others who are now publishing M3.

bart
07-01-08, 06:25 PM
I will get "Dying of Money" from the library and put up the pdf if you are interested in it.

Please do, I'd love to host it on my site and read it (instead of scanning a copy) too. I gather that it's public domain now?


There was a very illuminating article at Elaine Supkis' site

Martin Jr And The Destruction Of Gold Peg (http://elainemeinelsupkis.typepad.com/money_matters/2008/06/elaine-meine-16.html)

Yes, Martin is definitely one of the "very best people" who actually is very far from it, and not a favorite person of mine.

Martin Armstrong had many "interesting" things to say about him and what he did and did not do in the '20s that helped create the mess and also the Great Depression in his downloadable "The Greatest Bull Market In History" (http://web.archive.org/web/19980523082828/http://www.princetoneconomics.com/Research/GBM/GBM-MAST.HTM).

bill
07-01-08, 06:33 PM
So I hope with the above I have convinced you at least that something new and hyperinflationary in nature is going on with oil prices.
It is now getting so bad that the state and local governments are starting to appeal to the Federal government for help:

Now getting so bad countries ask for help.

http://www.imf.org/external/pubs/ft/survey/so/2008/NEW070108A.htm



NEW IMF STUDY
Price Surge Driving Some Countries Close to Tipping Point—IMF

IMF Survey online


July 1, 2008

Food and oil price surge hurting poorest countries the most
IMF study shows some countries at a tipping point
Strauss-Kahn calls for broad cooperative approach

The impact of surging oil and food prices is being felt globally but is most acute for import-dependent poor and middle-income countries confronted by balance of payments problems, higher inflation, and worsening poverty, a new IMF study warns.
Analyzing the macroeconomic policy challenges arising from the price surges, the study argues that many governments will have to adjust policies in response to the price shock while the international community will need to do its share to address this global problem.
In advanced countries higher food and fuel prices are reducing people's living standards and making it more difficult for governments and central banks to support growth while containing inflation.

It also stands ready to help with balance-of-payments support, and has already provided additional financial assistance to seven low-income countries through the concessional Poverty Reduction and Growth Facility. It is also streamlining the Exogenous Shocks Facility to make it more useful to IMF members, and stands ready to provide support for middle-income countries through Stand-By Arrangements.


Now where is that IMF, SWF manager?
found him
http://en.rian.ru/business/20080630/112615283.html

http://img.rian.ru/images/11255/25/112552534.jpg




MOSCOW, June 30 (RIA Novosti) - The United States intends to set favorable conditions for investment, including from Russia, the U.S. treasury secretary said Monday in Moscow. At a meeting with the Russian prime minister, Henry Paulson told Vladimir Putin that the U.S. welcomed investment, including from state sources, and would do everything to make sure the investment flows continue.
Paulson said investing in the U.S. should be attractive to Russia's "sovereign fund", but Putin told him Russia does not yet have a sovereign investment fund, although the authorities are ready to consider setting up one.

Charles Mackay
07-01-08, 07:41 PM
I will get "Dying of Money" from the library and put up the pdf if you are interested in it.

Please do, then I won't have to worry so much when I loan people my only copy!!!

GRG55
07-01-08, 08:22 PM
Obviously if the Fed raises rates, PMs will fall. Are deflationistas seriously expecting the Fed to commit fast political suicide by hiking rates during a credit crunch when it can die by slow, politically more expedient inflationary suicide instead?

That is the essence of Ka-Poom Theory, that governments always prefer slow suicide with the potential for recovery within the term of the current administration over the fast suicide with no chance of recovery.

Avoiding sudden death is a time honoured tradition at the Fed; something the deflatinists prefer to overlook apparently...


"Booms, it must be noted, are not stopped until after they have started. And after they have started the action will always look, as it did to the frightened men in the Federal Reserve Board in February 1929, like a decision in favour of immediate as against ultimate death. As we have seen, the immediate death not only has the disadvantage of being immediate but of identifying the executioner."
--John Kenneth Galbraith, "The Great Crash 1929"--
That is why there has never been any serious danger of a Fed rate hike in present circumstances, and little danger of any sustained rate hike from the ECB either. History rhymes...

Charles Mackay
07-01-08, 11:42 PM
Obviously if the Fed raises rates, PMs will fall. Are deflationistas seriously expecting the Fed to commit fast political suicide by hiking rates during a credit crunch when it can die by slow, politically more expedient inflationary suicide instead?

That is the essence of Ka-Poom Theory, that governments always prefer slow suicide with the potential for recovery within the term of the current administration over the fast suicide with no chance of recovery.

jimmy3 and Fred, aren't you both making an assumption that isn't born out in the historical record? Interest rates rose for the entire 13 year gold bull market from 1967 to 1980.

bart
07-01-08, 11:58 PM
Obviously if the Fed raises rates, PMs will fall.


Perhaps a quibble, but I'd rather see that stated as "if the Fed raises rates so that they start to go truly towards the positive on a net basis".


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

Contemptuous
07-02-08, 03:34 AM
Bill - in amongst the fear each one of us now probably feels for our personal outcomes in the next decade, we occasionally also can feel a pang of sadness for what our country is turning into. This article about the US going hat in hand to Moscow to cringe for additional funds certainly qualifies in that category for Americans.

Charles Mackay
07-02-08, 04:41 PM
jimmy3 and Fred, aren't you both making an assumption that isn't born out in the historical record? Interest rates rose for the entire 13 year gold bull market from 1967 to 1980.

Finally had time to run the chart. The Green line is 30yr interest rates and the blue line is the POG. For the entire 13 year bull market it's about as tight as a correlation as you're going to get in markets. The inverse correlation that we've been getting since 2001 is a, cough cough, ... conundrum.

Or is it? During the great depression we also had falling interest rates and rising POG!



http://webpages.charter.net/bigboard/chart.gif

GRG55
07-02-08, 07:48 PM
Finally had time to run the chart. The Green line is 30yr interest rates and the blue line is the POG. For the entire 13 year bull market it's about as tight as a correlation as you're going to get in markets. The inverse correlation that we've been getting since 2001 is a, cough cough, ... conundrum.

Or is it? During the great depression we also had falling interest rates and rising POG!



http://webpages.charter.net/bigboard/chart.gif

Is it really a conundrum? Or is it that the real rate of interest is more important to the price behaviour of gold than the nominal rate?

Charles Mackay
07-02-08, 09:08 PM
Is it really a conundrum? Or is it that the real rate of interest is more important to the price behaviour of gold than the nominal rate?

Good point GRG55, they were certainly negative in the 70's as they are now but in the great depression when Homestake mining was quintupling while rates were going down I'm pretty sure real rates were positive. Default was the issue then.

Jim Nickerson
07-02-08, 09:59 PM
Is it really a conundrum? Or is it that the real rate of interest is more important to the price behaviour of gold than the nominal rate?


I should have posted a nice graph I saw a few days back (forget where) that showed the best gains for gold are when real interest rates are negative.

FRED
07-02-08, 10:23 PM
I should have posted a nice graph I saw a few days back (forget where) that showed the best gains for gold are when real interest rates are negative.

You may have seen it on this web site called "iTulip.com" in a graph included in an old article called "Idiot's guide to investing in gold."


http://www.itulip.com/images/idiotsgoldguide.gif

Jim Nickerson
07-02-08, 10:37 PM
You may have seen it on this web site called "iTulip.com" in a graph included in an old article called "Idiot's guide to investing in gold."



http://www.itulip.com/images/idiotsgoldguide.gif


That wasn't it, FRED, it was a simpler graph that required almost no thinking to grasp its point--right down my line so to speak.

Jim Nickerson
07-02-08, 10:37 PM
You may have seen it on this web site called "iTulip.com" in a graph included in an old article called "Idiot's guide to investing in gold."



http://www.itulip.com/images/idiotsgoldguide.gif


That wasn't it, FRED, it was a simpler graph that required almost no thinking to grasp its point--right down my line so to speak. Your's does make the same point but not as simply. I'll look again for it.

Jim Nickerson
07-02-08, 11:02 PM
What is missing from your chart, FRED, is the price action of gold.

FRED
07-03-08, 10:24 AM
What is missing from your chart, FRED, is the price action of gold.

Telling iTulipers that an environment of sustained negative real interest rates is ripe for gold investing is like telling followers of Copernicus that the earth is not the center of the universe. :D

Not unique to iTulip, however. Zeal's charts are decent.


http://goldseek.com/news/EricHommelberg/images/4-1eh/4.PNG

afishmcvay
07-12-08, 09:38 PM
Okay, I'll admit it. I don't understand the whole debate at all. All it leads to is questions in my mind like this:

Why does the entire economy inflationary or deflationary? Why is it important to be in 100% in one camp or the other? I see elements of both happening right now from what I've read.

Some other questions: I definitely get how fractional reserve lending increases the immediate money supply. However, I don't see any discussions on the impact of interest in all of that. After all, when you lend $100, you don't expect to get $100 back. You want $110 back or, if you are a credit card company, $124 plus fees. ;)

It seems like repaid interest money would lessen the payor's ability to spend money "real" things. My sense is that interest (or at least too much of it) puts downward pressure on prices (especially discretionary items) in the long term.

Also, how would paying back a loan be 100% deflationary? In theory, the reserves of the bank have just increased. Couldn't they lend it out again at the rate of their reserves? Doesn't the payor now have more money buy stuff?

If default isn't deflation, then why would the Feds express worry about it in their actions to inflate the dollar?

Also, I'm not sure that I buy (tee-hee) that all money created stays in the system forever. Created money can be mal-invested and therefore it is lost: buildings rot, or are bulldozed, crops misplanted, raw materials shipped 1/2 around the world, assembled, and thrown away in dumpster without use are examples of destroyed money. (Or at least to me. ;))

I guess the debates are lost on me. What I see two or three (or more) very intelligent men, whose actual advice and worries about the economy appear to be very similar, all talking to each other in semantic circles. The picture painted by all of you isn't pretty or going to be solved anytime soon. :mad:

c1ue
07-13-08, 12:04 PM
The difference is this:

Deflation = Great Depression.

No jobs, but everything gets cheaper for those with existing cash.

Inflation = Weimar Republic.

Everyone gets screwed - with or without cash - and then Hitler comes.

So you see, it does matter.

jk
07-13-08, 12:55 PM
The difference is this:

Deflation = Great Depression.

No jobs, but everything gets cheaper for those with existing cash.

Inflation = Weimar Republic.

Everyone gets screwed - with or without cash - and then Hitler comes.

So you see, it does matter.

disjointed 'flation = disparate sectors of the economy asynchronously blowing up and collapsing. disjointed 'flation is of questionable stability, with the possibility of devolving into either a pan-inflationary or a pan-deflationary scenario. disjointed 'flation may also show a predominance of either inflationary or deflationary symptoms, without fully devolving into either extreme scenario. thus, the debates.

a key to examining this model is understanding the role of the financial system - the f.i.r.e. economy. the ongoing collapse of fire institutions raises questions about the mechanisms by which money will enter the real, production-consumption economy. see bill gross' recent piece at http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+July+2008.htm for his analysis, consistent with itulip analysis, that the mechanism must be federal spending.


edit: how does disjointed flation differ from a normal economy? after all, in any normal economy there will be some sectors growing and some declining. i suppose the difference is one of degree: the extreme nature of both the expansions in some sectors [e.g. tmt in the '90's, housing in the '00's], and the collapse in others [tmt in the early '00's, housing and housing-finance now].

Contemptuous
07-13-08, 02:47 PM
Inflation blah-blah-blah, deflation blah-blah-blah, FIRE econ this that or the other blah-blah-blah, unsustainable debt blah-blah-blah, unsustainable US consumer vendor financing blah-blah-blah, unsustainable bubble in commodities blah-blah-blah, peak money blah-blah-blah, US dollar as global locomotive of inflation blah-blah-blah, 30 years of latent inflation coming home to roost blah-blah-blah, gold bubble blah-blah-blah, spectre of 1929 blah-blah-blah, soaring USD while all the inflation hedgers get taken to the woodshed for their stupidity and greed blah-blah-blah, contrarian this that and the other blah-blah-blah, contra-contrarian this that and the other blah-blah-blah, DOW theory non-confirmation thingys blah-blah-blah, Hindenburg omens blah-blah-blah, technical analysis portends this that or the other blah-blah-blah, folly of goldbugs blah-blah-blah, faith in productive assets that carry a yield blah-blah-blah, collapsing "energy footprints" blah-blah-blah, collapsing "money velocity" blah-blah-blah, collapsing banks portends deflation blah-blah-blah, collapsing banks portends inflation blah-blah-blah, economic collapse leading to wars blah-blah-blah, creeping US fascism due to bankruptcy blah-blah-blah, Michael Hudson says blah-blah-blah, Misesian theory says blah-blah-blah, Schumpeter says blah-blah-blah, Simon says blah-blah-blah, Gott im Himmel says blah-blah-blah, the impossibility of inflation due to static wages blah-blah-blah, the collapse of "third world" growth due to US economic implosion blah-blah-blah, central banks "invent" a new senior currency and so render "goldbugs" foolish blah-blah-blah, the general stupidity and naivete' of "goldbugs" blah-blah-blah, the financial origin of all commodity booms blah-blah-blah, the plummeting cost of manicures is intensely deflationary blah-blah-blah, China's manifest inflation vs. US manifest deflation is a supremely rational construct blah-blah-blah, China's GDP to collapse post-Olympics blah-blah-blah, Obama will do this that and the other, thus causing this that and the other blah-blah-blah, McCain will do this that and the other thus causing this that and the other blah-blah-blah, Israel will bomb Iran causing a massive deflation blah-blah-blah, America will bomb Iran thus causing a massive deflation blah-blah-blah, Iran will bomb the Republic of Sao Tome and Principe, thus causing massive deflation and another string of Hindenburg omens blah-blah-blah, Peace will break out thus causing the price of oil to collapse blah-blah-blah, the Bush administration will finally go away thus causing Peace to break out which will remove the "fear premium" in commodities and be intensely deflationary blah-blah-blah, the USD collapse will usher in an era of Peace through equality of nations blah-blah-blah, the plummeting price of Condos is intensely deflationary blah-blah-blah, an outbreak of SARS will be the trigger ushering in global deflation blah-blah-blah, an outbreak of blather will be the trigger ushering in a global deflation blah-blah-blah, the soaring price of a loaf of bread will trigger revolutionary outbreaks of brilliance among deflationista financial analysts blah-blah-blah ...

Meanwhile ... in the rest of the world, the earnestly conducted, blow by blow, North American INFLATION / DEFLATION debate is summarily ignored. Instead, they are merely struggling to cope with this : ...

_______________

Global Inflation Turmoil Watch:

July 7 - The Wall Street Journal (Roger Bate): "Amid Zimbabwe's political violence is an economic lesson for anyone who doesn't keep an eye on inflation... With food aid only trickling back into the country and hundreds of thousands without enough cash to buy food, it was clear during a trip there last month that the crisis is deepening. Consumer prices have more than doubled every month this year, in some cases doubling every week. A conservative estimate provided by Robertson Economic Information Services, a Southern African consultancy, says that prices are now three billion fold greater than seven years ago...

The exchange rate is currently an astronomical 90 billion Zimbabwe dollars to one U.S. dollar... Buying anything is a 'bizarre experience,' said Lucy Chimtengwende from Bulawayo, who spent $12 U.S. on lunch recently, with the bill in local currency being an astonishing 1.1 trillion Zimbabwe dollars. The menu had no prices on it, she told me by phone, prices are quoted to you and are constantly changing. And if you want to pay by check, good luck. Most proprietors don't accept them, and for those that do, the price is double, given the time it takes the vendor to receive payment."

July 8 - AFP: "Soaring food and fuel prices could spark widespread political unrest, Malaysia's Prime Minister Abdullah Ahmad Badawi said... Abdullah said the inflation crisis has erupted as a global recession looms, spelling trouble for the D8 group meeting in Malaysia. The countries represented at the forum were Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan and Turkey. Abdullah also called on member nations to boost food production to avert conflict. 'The price of oil has skyrocketed to levels never anticipated... The price of food has increased beyond the normal abilities to pay by the poor, which form the majority of the world's people... There is also the danger of the food crisis creating political unrest in many societies.'"

July 7 - Associated Press: "Saudi Arabia: Sultan al-Mazeen recently stopped at a gas station to fill up his SUV, paying 45 cents a gallon -- a price Americans could only dream of as they pay nearly 10 times that at the pump. But cheap gas and the record wealth pouring into Saudi Arabia's coffers from high oil prices are little relief for al-Mazeen. The 36-year-old Saudi technician and many other Saudis say they're only feeling poorer amid the oil boom because of inflation that has hit 30-year highs in the kingdom. 'I tell the Americans, don't feel envious because gas is cheaper here,' said al-Mazeen. 'We're worse off than before.'"

July 9 - Bloomberg (Janice Kew): "Higher fuel costs may make taxi fares unaffordable for poorer South Africans, threatening jobs, Business Report said, citing Carel van Aardt, a research professor at University of South Africa... About 60% of commuters in South Africa use minibus taxis and most users earn 700 rand ($91) to 4,000 rand a month..."

July 9 - Bloomberg (Radoslav Tomek): "The Slovak government is ready to regulate prices after the eastern European nation switches to the euro to prevent 'speculative' increases that would accelerate inflation, Economy Minister Lubomir Jahnatek said. The government approved establishing a so-called Price Council which will monitor consumer prices throughout 2009.

The council will have powers to ask the government to regulate prices of particular goods or services, should it discover any ``anomalies' in their development, according to a document of the proposal discussed by the Cabinet today."

July 11 - Bloomberg (Khalid Qayum): "Pakistan's inflation accelerated to a 30-year high in June... Consumer prices in South Asia's second-largest economy jumped 21.53% from a year earlier..."

July 9 - Bloomberg (Abeer Allam and Abdel Latif Wahba): "Egyptian inflation accelerated to an average 11.7% in the fiscal year that ended June 30..."
July 7 - Bloomberg (Daryna Krasnolutska and Halia Pavliva): "Ukraine's inflation, the fastest in Europe... fell to 29.3% in June from 31.1% in May, which was the highest in Europe..."

July 9 - Bloomberg (Milda Seputyte): "Lithuanian inflation accelerated in June to the fastest pace in more than 11 years... The inflation rate rose to 12.5%, the third-highest in the EU, from 12 percent in May..."

July 7 - Bloomberg (Ott Ummelas): "Estonian inflation accelerated in June, returning to the fastest pace in 10 years, as energy and accommodation costs jumped. The rate increased to 11.4%..."

July 9 - AFP: "Inflation in some emerging countries in Latin America and Africa 'is getting out of control,' International Monetary Fund head Dominique Strauss-Kahn said..."

Currency Watch:

July 9 - Bloomberg (David M. Levitt): "New York's Chrysler Building, once the world's tallest skyscraper, was acquired yesterday by the Abu Dhabi Investment Council, a Middle Eastern sovereign wealth fund, for an undisclosed price."

The dollar index declined 0.9% to 72.1. For the week on the upside, the South Korean won increased 3.8%, the Euro 1.3%, the Danish krone 1.3%, the South African rand 1.3%, the Swiss franc 1.1%, and the Australian dollar 1.0%. On the downside, the Taiwanese dollar and the Brazilian real both declined 0.1%.

Commodities Watch:

July 7 - Bloomberg (Chanyaporn Chanjaroen): "Aluminum rose to a record in London as a power shortage forced smelters in the north of China, the world's largest producer of the metal, to reduce output."

Gold rose 3.3% to $964 and Silver 2.4% to $18.82. August Crude added 40 cents to $144.52. August Gasoline declined 0.6% (up 43% y-t-d), while August Natural Gas sank 12.9% (up 58% y-t-d). September Copper dropped 5.3%. September Wheat dropped 6.2% and August Corn sank 8.8%. The CRB index declined 2.3% (up 28.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 1.2% (up 44% y-t-d and 73% y-o-y).

China Watch:

July 7 - Wall Street Journal Asia (Lawrence J. Brainard): "It's becoming ever clearer that China's inflation problem is a monetary phenomenon after all, and not just a temporary spike in the prices of a couple food staples. But consensus on how to solve that monetary problem is still elusive. Beijing's adoption last week of administrative measures to combat speculative 'hot money' inflows shows policy makers still believe... that tightening regulation alone can do the trick.

That may prove a costly mistake. Consider the scale of the problem facing policy makers. Headline consumer price inflation has clocked in at or above 7.1% every month this year. Supply shocks for foods like pork play a role, but the fundamental problem is too much money pouring into the economy, chasing too few assets. One indicator of this is that China has recently been accumulating foreign assets at the astonishing rate of $75 billion a month."

July 8 - Bloomberg (Tian Ying): "China's car sales rose 17% in the first half as economic growth spurred demand in the world's fastest growing major vehicle market. Automakers sold a total of 3.61 million cars, sport-utility vehicles and multipurpose vehicles..."

July 11 - Bloomberg (Li Yanping and Nipa Piboontanasawat): "Foreign direct investment in China rose 45.6% in the first half from a year earlier, swelling inflows of cash that may stoke inflation in the world's fastest-growing major economy. Spending by overseas companies increased to $52.4 billion..."

Japan Watch:

July 10 - Bloomberg (Mayumi Otsuma): "Japan's wholesale inflation rate rose to a 27-year high in June as companies raised prices to counter record oil and commodity costs. Producer prices climbed 5.6% from a year earlier, after a revised 4.8% gain in May..."

July 11 - Bloomberg (Toru Fujioka): "Japanese consumers became the most pessimistic they've been in at least 26 years as higher gasoline prices and food costs eroded their spending power."

India Watch:

July 11 - Bloomberg (Kartik Goyal): "India's inflation accelerated to the fastest pace since 1995... Wholesale prices rose 11.89% in the week to June 28..."

July 11 - Bloomberg (Cherian Thomas and Kartik Goyal): "India's industrial production grew at the slowest pace in more than six years and Standard & Poor's said it may cut the nation's credit rating to junk if the economy deteriorates further... Bonds dropped after S&P said its BBB- ranking on India's long-term local currency debt may be lowered to 'speculative grade.' 'A rating downgrade would be a blow to India,' said Ramya Suryanarayanan, an economist at DBS Bank Ltd... 'Heading in that direction isn't good as investors are already panicking about inflation, growth and fiscal prospects.'"

Asia Bubble Watch:

July 9 - Bloomberg (Seyoon Kim): "South Korea's retail sales rose 10.2% in May as consumers paid more for gasoline and bought more cars and computers."

July 7 - Bloomberg (James Peng): "Taiwan's export growth unexpectedly accelerated in June on demand from China, Europe and Japan. Overseas shipments rose 21.3% from a year earlier after increasing 20.5% in May..."

July 9 - Bloomberg (Soraya Permatasari): "Malaysia's central bank said inflation probably exceeded 6% in June, higher than earlier estimated and bolstering expectations it will raise interest rates as early as this month."

July 8 - Bloomberg (Kyung Bok Cho): "Asian companies outside Japan will face a 'perfect storm' of rising commodities costs and slowing growth in export volumes, triggering earnings-estimate downgrades by analysts, Citigroup Inc. said. Materials and industrials stocks... have 'lofty' valuations and should be avoided..."

July 8 - Bloomberg (Naila Firdausi): "Indonesia's consumer confidence index dropped to a record low in June after the government increased fuel prices a month earlier and on concern that food costs will continue rising, a research body said."

July 8 - Bloomberg (Woro Widya Utami and Berni Moestafa): "Indonesia may have to spend as much as 300 trillion rupiah ($33 billion) to cap fuel prices next year as oil surges, Finance Minister Sri Mulyani Indrawati said."

Latin America Watch:

July 9 - Bloomberg (Jens Erik Gould): "Mexican inflation accelerated to the fastest in almost four years last month on higher costs for food and housing... Consumer prices climbed 5.26% in June from a year earlier..."

July 8 - Bloomberg (Daniel Cancel and Matthew Walter): "Venezuelan annual consumer prices in June rose the most since 2003 as the easing of price caps on foods caused supermarket prices to surge. Consumer prices rose 32.2% in June from a year earlier..."

428

FRED
07-13-08, 10:03 PM
disjointed 'flation = disparate sectors of the economy asynchronously blowing up and collapsing. disjointed 'flation is of questionable stability, with the possibility of devolving into either a pan-inflationary or a pan-deflationary scenario. disjointed 'flation may also show a predominance of either inflationary or deflationary symptoms, without fully devolving into either extreme scenario. thus, the debates.

a key to examining this model is understanding the role of the financial system - the f.i.r.e. economy. the ongoing collapse of fire institutions raises questions about the mechanisms by which money will enter the real, production-consumption economy. see bill gross' recent piece at http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+July+2008.htm for his analysis, consistent with itulip analysis, that the mechanism must be federal spending.

edit: how does disjointed flation differ from a normal economy? after all, in any normal economy there will be some sectors growing and some declining. i suppose the difference is one of degree: the extreme nature of both the expansions in some sectors [e.g. tmt in the '90's, housing in the '00's], and the collapse in others [tmt in the early '00's, housing and housing-finance now].

EJ writes in:
As aways, you make good points. Thank you for noting Gross' recent article.

When I first started to look into the inflation versus deflation issue ten years ago, within a short time it became clear to me that the US was deflation prone due to over-indebtedness but also inflation prone because its currency was vulnerable to depreciation for all of the classical reasons, not least massive fiscal and trade imbalances, and foreign indebtedness.

I developed Ka-Poom Theory after concluding that in the event the US government by following post Great Depression anti-deflation monetary orthodoxy was setting the US up for a future inflation spiral kicked off by currency depreciation to defend against debt deflation. Later, as the government eventually found ways to compensate for dysfunction in the endogenous credit markets to prevent a self reinforcing cycle of credit contraction at some point after the inevitable debt crisis appeared, every effort to close the "break in the chain of payments" was to result in further dollar depreciation; all this even before foreign capital flows reverse. If and when that happens the greater inflationary process I've put forward in Ka-Poom Theory remains in the realm of possibility.

Next week I will dissect a strong inflation versus deflation analysis by Lehman economist Aaron Gurwitz published last week. It is not only thought provoking but lays out a compelling contradictory theory, that the US risks a deflation spiral long term. It's worth noting that the debate has reached the point that investment bank economists feel compelled to provide analysis of the question for their clients who are demanding that investment decisions be made with these factors in mind.

The error that most analysts make who are not familiar with the theory and the history is that the processes involved need to be conceptualized not in terms of levels of debt, or money, or credit, although levels are indicative, but rather relative money flows, changes in flows as measured in rates of change in levels, and interactions among processes that affect flows, such that processes that we have long experienced as homeostatic and stable can suddenly become unstable and chaotic. Inflation and deflation have to be understood as processes that can become suddenly unstable and self-reinforcing after a breaking point is reached, with monetary intervention either only marginally mitigating or even accelerating the process.

Of all the many articles and books I have read on the topic none is better than Irving Fisher's 1933 "Debt-Deflation Theory of Great Depressions (http://www.fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf)" and I strongly recommend it to anyone with an interest in the subject.

Four conclusions of his which have stood the test of time that I believe are indisputable: 1) major depressions, whether inflationary or deflationary, follow from the malady of over-indebtedness and that all other factors, such as mal-investment, are secondary or result from the condition of over-indebtedness; 2) there is no such thing as a business cycle. There are processes that repeat, but not on their own, leading to; 3) markets do not heal themselves as they do not tend toward equilibrium. The myth of the self-healing market is pervasive, even among many of our esteemed members, despite fact that there exists not one shred of historical evidence to support it; and 4) deflations are always preventable, although the cure may be worse than the disease for many members of society, while inflations are not always preventable.

In spite of clear and ancient wisdom so well verified by 75 years of history, I frequently encounter all manner of confused analysis of the issue. I read about "inflation scares" and "deflation scares" and other creative and often tautological inventions to explain the impact of intervention by governments in the debt deflation process, as if the inflation expectations of market participants were a product of their own expectations.

The Fed has succeeded in preventing deflation and will continue to do so at considerable cost to the purchasing power of the US dollar. The Bernanke Fed is so keenly aware of the risks of a deflation spiral, given the degree of over-indebtedness of the US household, financial, and business sectors, that I imagine a white knuckle ride up the yield curve, Ka-Poomwise, with the Fed funds rate closely following inflation by no less than two points but never exceeding it for fear of tipping the system into a deflationary spiral before debt levels have been sufficiently reduced by the inflation process.

ocelotl
07-14-08, 08:24 AM
...

Latin America Watch:

July 9 - Bloomberg (Jens Erik Gould): "Mexican inflation accelerated to the fastest in almost four years last month on higher costs for food and housing... Consumer prices climbed 5.26% in June from a year earlier..."...
428

5.5% on our direct comparison CPI scale is troubling. Our housing cost increasings are due to steel, cement and related materials cost hikes, and that for the period 2003-6 housing costs were increasing below CPI, that had to change.

I do fully expect that for next Aug-Oct period, the Banxico daily auction increases from the actually 32 million USD to somewhere between 40 to 50 million (yep, Banxico buying more pesos)... That is really not too much, given that the daily trade between US and Mexico is somewhere around 1 billion USD, and Banxico reserves around 83 billion USD, real dumping of USD would mean in my opinion daily auctions on the 100s of million of USD.

ocelotl
07-16-08, 01:11 AM
5.5% on our direct comparison CPI scale is troubling. Our housing cost increasings are due to steel, cement and related materials cost hikes, and that for the period 2003-6 housing costs were increasing below CPI, that had to change.

I do fully expect that for next Aug-Oct period, the Banxico daily auction increases from the actually 32 million USD to somewhere between 40 to 50 million (yep, Banxico buying more pesos)... That is really not too much, given that the daily trade between US and Mexico is somewhere around 1 billion USD, and Banxico reserves around 83 billion USD, real dumping of USD would mean in my opinion daily auctions on the 100s of million of USD.

:eek: My first correct call on what banxico is going to do... and before Bloomberg's note...


Mexico's Peso Holds Near Five-Year High on Interest-Rate Spread
By Valerie Rota
July 14 (Bloomberg) -- Mexico's peso held near a five-year high on mounting speculation the difference between Mexican and U.S. benchmark lending rates will continue to widen, drawing investors to the nation's higher-yielding securities.
The peso has risen 5.8 percent this year as two interest- rate increases by Banco de Mexico since October have swelled the spread (http://www.bloomberg.com/apps/quote?ticker=MXONBR%3AIND) between Mexican and U.S. lending rates to 5.75 percentage points, the biggest since September 2005. Mexican central bankers will raise the key rate by a quarter-percentage point to 8 percent when they meet on July 18, according to the median estimate of 20 analysts surveyed by Bloomberg.


Continued... (http://www.bloomberg.com/apps/news?pid=20602096&sid=aggNA46rEMHs&refer=world_currencies)





Also...

Mexican Bonds Rise on Bets Central Bank to Keep Rates Unchanged (http://www.bloomberg.com/apps/news?pid=20601086&sid=auyorqUBhLKA&refer=latin_america)


15 de julio de 2008

El Banco de México anuncia que durante el periodo del 1 de agosto al 31 de octubre de 2008 subastará diariamente 40 millones de dólares. Dicho monto se determinó de acuerdo con lo dispuesto en las Circulares-Telefax 18/2003 Bis y Bis 1, como se ilustra en los siguientes cuadros:

Official Banxico press comunicate. (http://www.banxico.org.mx/documents/%7B421012C8-F0A1-1AE7-B2C9-51F1F7372C81%7D.pdf) (in spanish)

Contemptuous
07-16-08, 02:19 PM
Ocelotl -

Major trading partners to the US (like Mexico) would probably not be the first ones to enter into large scale USD dumping? However what you refer to, the internal inflation rate, would seem to be the "pressure point" for all US major trade partners to sharply reduce exposure to the USD. As global inflation rates rise with the fundamental costs pushing up the oil price, the single largest method of effective relief which oil exporter nations may find they still have, to keep at least some control on inflation seems most likely the decoupling from the USD and letting their currencies strengthen - especially the oil producers. The pricing power of their oil will of course only strengthen going forward, which provides a natural momentum for their currencies to remain stronger and/or rise vs. the USD, so this tactic seems to have a high probability of being widely used.

Does not spell good things coming for anyone living and working in the USD zone.

What will be fascinating to watch is how the world begins to evolve away from global outsourcing of manufacturing, as the price of long distance transport moves up enough to finally negate the cost benefits of having Americas goods manufactured in Vietnam, for example. It's hard to imagine a world of "nuclear powered commercial cargo ships" for example, no? And without that, in a world of $300 per barrel oil (3 - 4 years away?) how much cost advantage, (let alone strategic advantage for the entire world) is there to keep shipping the vast bulk of "low cost" manufactured goods from Asia to America? This may translate into surprisingly strong growth in factory floor industry for Central America and Mexico, to take over a quantity of manufacturing from SE Asia for the North American market. The world could look surprisingly different in just another 7-10 years. But of course, with Peak Cheap Oil, that is just a statement of the obvious.

ocelotl
07-16-08, 04:47 PM
Ocelotl -

Major trading partners to the US (like Mexico) would probably not be the first ones to enter into large scale USD dumping? However what you refer to, the internal inflation rate, would seem to be the "pressure point" for all US major trade partners to sharply reduce exposure to the USD. As global inflation rates rise with the fundamental costs pushing up the oil price, the single largest method of effective relief which oil exporter nations may find they still have, to keep at least some control on inflation seems most likely the decoupling from the USD and letting their currencies strengthen - especially the oil producers. The pricing power of their oil will of course only strengthen going forward, which provides a natural momentum for their currencies to remain stronger and/or rise vs. the USD, so this tactic seems to have a high probability of being widely used.

Does not spell good things coming for anyone living and working in the USD zone.

What will be fascinating to watch is how the world begins to evolve away from global outsourcing of manufacturing, as the price of long distance transport moves up enough to finally negate the cost benefits of having Americas goods manufactured in Vietnam, for example. It's hard to imagine a world of "nuclear powered commercial cargo ships" for example, no? And without that, in a world of $300 per barrel oil (3 - 4 years away?) how much cost advantage, (let alone strategic advantage for the entire world) is there to keep shipping the vast bulk of "low cost" manufactured goods from Asia to America? This may translate into surprisingly strong growth in factory floor industry for Central America and Mexico, to take over a quantity of manufacturing from SE Asia for the North American market. The world could look surprisingly different in just another 7-10 years. But of course, with Peak Cheap Oil, that is just a statement of the obvious.


A similar situation of demand dissapareance has already taken place before, at the bust of the dotcom bubble. I was working in maquila in a plant here in Mexico City that exported all its production to US. Suddenly, due to the bust, the demand dissapeared. What was an assembly plant of 1,000+ workers at the end of the year 2000 party dwindled to about 250-300 at the time I was laid off in august 2001. By 2005 that plant was absorbed in a company fussion.

Nowadays many major manufacturers are pricing the advantages of having a NAFTA covered plant in Northern Mexico to export to US, but, as you are pointing, case is not only shipping costs, that are going to get prohibitive in the next decade, but also demand destruction by the degrading economy of oil importers.

We that live in oil exporting countries may have a slight advantage, while extraction keeps supporting internal demand, and those of us that work in companies based on internal demand or are in a self sustaining economical niche have also a bit of extra time, but at the end, the oil shock is going to hit hard all of us, and if we are not prepared, it is going to get very ugly very quickly.

I really hope a decoupling of dollar and coupling on internal resources and commodities happen in the foreseable future. We mexicans face a critical situation, and we have to remember that a coupling to US and UK currency in the monetary law of 1905 was one of the factors that precipitated 1910 Mexican Revolution, and that French intervention on Spain by the Bonapartes resulted in the 1808 Spanish Revolution and 1810-25 dismantling of Spanish Empire. Hope the approach we are in the process of implementing this time stands enough to avoid a disaster in the coming years.

Contemptuous
07-24-08, 01:54 AM
Rick Ackerman is ever busier sidling over towards the dollar inflation camp without actually conceding he's "sidling over". Reminds me of the way a crab walks - SIDEWAYS. :mad:

CURRENT QUOTE:

So what do we think of the bearish price action yesterday in precious metals? We see it as a buying opportunity, and we will therefore continue to update our forecasts with correction targets that can be bottom-fished with relatively little risk. In the meantime, anyone who thinks the selling in precious metals is going to continue for much longer obviously does not understand the implications of a Federal budget deficit soon to leap above $10 trillion and presumably out of control. The spinmeisters may be able to distract CNBC viewers from the meaning of this, and from the inevitable destruction of the dollar that it must cause. However, our foreign lenders will surely recognize it as a warning of a catastrophe in the offing. Although falling oil prices could temporarily take some pressure off the dollar by causing the trade deficit to shrink, there should be no doubt that the moist ruinous phase of the currency’s bear market lies ahead.

All this is delivered with a "blow by blow" account of how his pivot point analysis nailed the bottom in the silver price swoon to within "one tick". Geez, with all this avid enthusiasm for the "bottom fishing" purchases of precious metals, combined with categorical assurances of the death throes for the US dollar, how the heck does Rick Ackerman compose himself for an about face with further arguments for generalised deflation? Mr. Ackerman, the above quotes in the context of your endlessly defended generalised deflation thesis are GOBBLEDEGOOK! Either the dollar is gaining against a broad index of goods and service prices, or it is losing ground. Please come on over here and explain to the iTulip people how you shoe-horn the "inevitable destruction of the dollar" which you now actually promote, with the generalized deflation you've spent years arguing for?

Does the name "Argentina" not provide Ackerman with a hint of the gargantuan conceit he is indulging here in not conceding that a foreign repudiation of the dollar (he's mentioning explicitly now!) hardly provides the backdrop for the USD to appreciate against a single damn thing, here in the US??

http://news.silverseek.com/RickAckerman/1216879200.php

metalman
07-24-08, 05:51 PM
Rick Ackerman is ever busier sidling over towards the dollar inflation camp without actually conceding he's "sidling over". Reminds me of the way a crab walks - SIDEWAYS. :mad:

CURRENT QUOTE:

So what do we think of the bearish price action yesterday in precious metals? We see it as a buying opportunity, and we will therefore continue to update our forecasts with correction targets that can be bottom-fished with relatively little risk. In the meantime, anyone who thinks the selling in precious metals is going to continue for much longer obviously does not understand the implications of a Federal budget deficit soon to leap above $10 trillion and presumably out of control. The spinmeisters may be able to distract CNBC viewers from the meaning of this, and from the inevitable destruction of the dollar that it must cause. However, our foreign lenders will surely recognize it as a warning of a catastrophe in the offing. Although falling oil prices could temporarily take some pressure off the dollar by causing the trade deficit to shrink, there should be no doubt that the moist ruinous phase of the currency’s bear market lies ahead.

All this is delivered with a "blow by blow" account of how his pivot point analysis nailed the bottom in the silver price swoon to within "one tick". Geez, with all this avid enthusiasm for the "bottom fishing" purchases of precious metals, combined with categorical assurances of the death throes for the US dollar, how the heck does Rick Ackerman compose himself for an about face with further arguments for generalised deflation? Mr. Ackerman, the above quotes in the context of your endlessly defended generalised deflation thesis are GOBBLEDEGOOK! Either the dollar is gaining against a broad index of goods and service prices, or it is losing ground. Please come on over here and explain to the iTulip people how you shoe-horn the "inevitable destruction of the dollar" which you now actually promote, with the generalized deflation you've spent years arguing for?

Does the name "Argentina" not provide Ackerman with a hint of the gargantuan conceit he is indulging here in not conceding that a foreign repudiation of the dollar (he's mentioning explicitly now!) hardly provides the backdrop for the USD to appreciate against a single damn thing, here in the US??

http://news.silverseek.com/RickAckerman/1216879200.php

rick's and mush's kids wade up to the deep end where the big ideas like the fire economy fit... go "oooh! scary!" and dog paddle away.

we try to give them swimming lessons, teach them crawl and butterfly strokes, but they'd rather hop and splash around in 3 ft of water with the same little toys... evil fiat money! dishonest fractional reserve banking! gold is money! the fire economy is in the deep end of the pool. they will NEVER understand what going on and going to happen. ever. give up.

Chris
09-02-08, 03:57 AM
I thought you guys might be interested in listening to even more debate about inflation/deflation. The usual suspects are involved. Mish begins by wanting to change the definition of deflation. Sigh...

http://commoditywatch.podbean.com/

metalman
09-02-08, 06:40 AM
I thought you guys might be interested in listening to even more debate about inflation/deflation. The usual suspects are involved. Mish begins by wanting to change the definition of deflation. Sigh...

http://commoditywatch.podbean.com/

as i said, give up. they'll never figure it out, and anyway they're selling funds and other financial products, s even if they did get it they'd have to spin it to fit the facts to the product features or no more paycheck.