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FRED
10-27-08, 05:36 PM
http://www.itulip.com/images/deflationspiral.gifThe truth about deflation

by Eric Janszen

With all of this panicking into dollars we get asked a lot about deflation. "Why don't you just admit that a 1930s style depression and deflation spiral has begun and soon there will be soup lines and we'll be buying cars for $2,000 and gold will trade at $100." The reason is that we are 100% certain that dollar appreciation that we call "Ka" as part of Ka-Poom Theory will not turn into a deflation spiral. Cars are not going to cost $2,000, although there will be plenty of cheap used cars for sale, and gold will not go to $100. Here's why.

The essence of Ka-Poom Theory is that after the phony credit-based boom ends, first the dollar rises and inflation falls before dollar repatriation and government reflation policies kick in. We don't think the transition from disinflation to inflation is trade-able because we expect it to be chaotic. But we don't blame readers for trying, or wanting to.

This ain't deflation

We're not nit picking terminology here. We’ll show you what a real deflation spiral looks like: nothing whatsoever like the deflation we are seeing today that we have long forecast and call disinflation to distinguish it from the run-away deflations that occurred under the gold standard in the pre Bretton Woods era.

Deflation was common back in the days when there was something for a currency to deflate against for more than a brief period of time before the government got involved: gold. Even then, governments often abandoned the gold standard to inflate the money supply to stop deflation, especially in times of war. If you are a government and need to inflate and there's no war to fight, then make something up–like an oil "shortage" in the 1970s.


http://www.itulip.com/images/cpi1913-2008G.gif

Note the early 1920s deflation reached -30% in some months and on and off for years at a time. Note also the massive inflations produced as the US government temporarily suspended gold convertibility and printed money to fund wars. Many forget that these huge swings occurred: 80% inflation during WWI and 100% inflation after WWII.

Governments can always produce inflation. Always.


http://www.itulip.com/images/cpi1930-1939G.gif

The period of deflation that occurred in the early 1930s is the one that most people think about when they hear the word "deflation." What they really mean is a deflation spiral, with the money supply imploding, credit contacting, large scale bankruptcies, rising unemployment, and falling economic output. Note that there was not a single month of inflation from 1930 to 1933. Prices went down and down and down. For years.

The 1930s deflation spiral ended abruptly in 1934. Why? FDR took the US off the gold standard and devalued the dollar 60% against gold which remained the international currency for trade transactions. As you can see from the chart this produced a 45% inflation despite the fact that the banking system was moribund as evidenced by a 50% decline in commercial credit after the failure of more than 25% of the nation's banks, and the money supply had declined 40% since 1929.

It was a dark episode in economic history and his is key–there has never been another similar period of deflation since then, in any country. Ever.

There is a reason for that: since the 1930s no country has been on a national gold standard.

Only one other government made the choice to stay on the gold standard at the time, Germany. Every other government got off the gold standard in the 1930s and inflated. Many, such as the US, finally resorted to currency depreciation when the pain got bad enough, exporting deflation. That was the impetus for Bretton Woods after the war: don't allow a repeat of competitive currency devaluations because nations in a global depression that fight each other with currencies are soon fighting each other with guns.


http://www.itulip.com/images/cpi1940-1949G.gif

There were a very brief few months of deflation after WWII as the government attempted, Paul Volcker style, to wring inflation out of the post WWII economy. But note the deflation scale in this post-Bretton Woods period has now changed from the post-gold standard era where deflations exceeded 30% in some periods. Since then, no more 30% deflations. Rarely, for short periods when deflation has happened since Bretton Woods deflation has only once exceeded 10% in one month and has generally been limited to less than 5%.

Take-away: No gold standard, no deflation spirals. Ever again.


http://www.itulip.com/images/cpi1960-1967G.gif

The first years of the 1960s were the golden era of monetary stability. In fact, life was so good the US government decided to ruin it by starting a war, building the military industrial complex, and launching numerous entitlement programs that we are to this day still kidding ourselves into thinking we can pay for. After running up a trade deficit that our trade partners feared we intended to pay with devalued dollars, the Europeans figured we were cheating and called our bluff by demanding payment of debts in gold. So we defaulted. US to the world: Thanks for playing!


http://www.itulip.com/images/cpi1968-1980G.gif

This was the ugly era of birth of the FIRE Economy. I won’t go into the details here but, clearly, deflation was not the problem. I will mention that this is when we came up with the dollar cartel to knock back OPEC and Nixon got to tell OPEC: "Thanks for playing!"


http://www.itulip.com/images/cpi1980-2008G.gif

As the Paul Volcker Fed raised interest rates, the US economy experienced a short spike of deflation around -5%. Since the technology stock bubble popped in 2000, the US has had several months of deflation like that in 2002, 2004, 2006, and 2007 intermixed with short periods of inflation exceeding 15%. This inflation volatility is characteristic of periods of financial system duress and is, as you can see quite different from the latest golden era of low inflation volatility from 1991 to 2000. This was, not coincidentally, the period of the greatest bull market in stocks in history.

If you want to call today’s period of low inflation a "deflationary period" then you must also call 2002, 2004, 2006, and 2007 deflationary–actually more deflationary than today if you look at the graphs. Meanwhile oil increased from $20 to $147 over that period–not exactly a typical symptom of deflation.

Japan also has never experienced a deflation spiral. They could end their modest deflations, never exceeding -2% in a quarter off and on for more than a decade, in short order by monetizing debt but such reflation policies provide no free lunch: the trade-off for Japan would be a crashed yen–so they don't. As long as they maintain a strong current account surplus it's unnecessary. "Deflation" has been a boon to Japanese consumers. The consequence of low interest rates and cheap products while high wage rates were maintain has meant that the savings rate in Japan has over the period dropped from one of the highest to one of the lowest in the world. The US will try every trick in the book and then some (http://www.itulip.com/forums/showthread.php?p=57193#post57193) before taking the drastic step of depreciating the dollar to stop a deflation spiral in the US before strong deflation expectations develop–and certainly before three years pass and the economy fails as in the 1930s–but ultimately can if necessary crash the dollar to do so.

The critical take-away is that we are indeed experiencing short term deflation. We call it disinflation here in the context of Ka-Poom Theory to keep readers from confusing the process with the start of a deflation spiral–which cannot happen under a floating exchange rate, fiat money system. The only way it could is if governments around the world all got together and decided to crash the global economy. That strikes us as unlikely. More likely one or more will move to reflate using currency devaluation.

If the Fed so desired the US could have 100% inflation by the middle of 2009 as the US did in 1946. All that is needed is for Congress to borrow a few more trillion into existence to fund old and new liabilities and have the Fed print it because our government cannot borrow the money from overseas or raise taxes, or devalue the dollar, or both.

It’s just that simple. Wish it wasn’t so. Trust your government not to do it?

Neither do we.

If not deflation, then what? Stagflation?

Keep an eye on producer price index, commercial lending rates, and wage rates. These tell you how much your local grocery stores, restaurants, gasoline stations, and other businesses have to pay–their input costs–as the recession drags on. As recession deepens, businesses have to cut prices to their customers to meet lower demand. If input costs don't fall quickly, many of these companies will either go out of business or be acquired by stronger rivals that have more cash or access to credit. If this goes on for years, as we expect it to, instead of a short drive to the local Home Depot it's a long drive, instead of 10 restaurants to choose from in the area there are five, instead of four grocery stores to visit there are two, instead of four daily flights to your favorite destination from the nearest airport there is one. The plane is crowded. You are packed in like a sardine. The fare is expensive.

Inflation comes not only from surfeit of money relative to goods and services but also a shortage of goods and services relative to the supply of money.

In a couple of years when you get to the one remaining Home Depot in your area that has not closed you will find that it's crowed. As most of the goods that Home Depot sells are imported, and the dollar continued to decline after the current short term panic into dollars ends–and the impact of net negative capital flows exerts its natural downward pricing on the dollar–the wholesale prices Home Depot pays will not decline much if at all. The government will welcome the devalued dollar, as it has since 2002, because the inflationary impact helps counter the deflationary impact of debt deflation and helps the US export position. Wage rates will not rise because recession will have caused higher unemployment and reduced wage earner's pricing power. However, at that point there will be few stores (boom market in plywood to cover plate glass windows?) and two or three times as many consumers vying for the same goods, and the cost of imports is up because the dollar had depreciated further; prices may actually rise.

In response, consumers will buy fewer things and will substitute lower quality products for higher quality products, hamburger for steak. The golden age of the American consumer ends.

Let's say you are an American visiting an indebted country years ago that has lost its ability to extend its purchasing power via foreign borrowing because that is the situation that the US faces today. For example, Mexico in the early 1980s. What do you see? You spend your strong dollars so experience prices there as cheap. You see crowded stores and low prices–crowded because the equilibrium price between the cost of goods that stores pay and prices that customers can afford creates only enough demand to support a small number of stores for the local population. But the people who live there experience the same stores as crowded but with high prices. Why? Because while the new equilibrium price for goods is now the same as before or maybe higher, but the purchasing power of consumers has fallen due to lack of access to credit and falling incomes.

That is our future in the US once the spike in the value of the dollar ends and the dollar continues its decline through this recession. This picture may, however, be distorted by government intervention to support the housing and credit markets to slow debt deflation. Government spending may further weaken the US dollar. Then there is the possibility that immigration and trade policy will change to address wage deflation by lowering competition for jobs via restrictions on outsourcing and immigration.

For my take on where the financial crisis and economic recession are going see Global Finance Disneyland Demolition (http://itulip.com/forums/showthread.php?p=57159#post57159) ($ubscription). The fantasy is over.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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ricket
10-27-08, 06:13 PM
The truth about deflation

It’s just that simple. Wish it wasn’t so. Trust your government not to do it?

Neither do we.

That's exactly right. I don't trust our government to make any of the hard decisions that are necessary. After all, if they were to do that, we wouldnt be in this situation in the first place. The government loves to tell us "don't worry your money is protected by the FDIC". While they are correct, the sentence should actually read "don't worry your money [the nominal value but not its purchasing power] is protected by the FDIC"

If the government has been stealing from us all this time to borrow and spend all of these silly programs into existence, then what makes anyone [*cough*phirang*cough*Mish*cough*] think this time will be any different? I think the deflationists pretend like the government is required by some law to play by the rules of "sound money" and won't try and grab monetary power as long as it suits their re-election potential.

walenk
10-27-08, 06:24 PM
Roubini was careful to note that the US is still selling Treasury bonds to fund its bailouts.
If and when there's no buyers for Treasuries, Poom begins.
Am I missing something? :o

ThePythonicCow
10-27-08, 06:53 PM
We don't think the transition from disinflation to inflation is trade-able because we expect it to be chaotic.


Good read. Thanks.

When you anticipate that the transition is not trade-able, are you saying you doubt it can be traded for big profits, or are you saying that it cannot even be traded for wealth preservation?

I can imagine that the purchasing power of the dollar for foreign goods (whether Wal*Mart or BMW) could collapse chaotically, but I'm at a loss to imagine that the purchasing power of the dollar for domestic


goods (do we still make anything?),
services (plenty of those),
energy (that's going to hurt, granted), and
food (that we can still produce in abundance, I hope)

could be cut in half chaotically.

Hmmm ... well the food from our "industrialized" big-ag depends on petro, which depends on our good friends in Venezuala, Russia, Saudi Arabia, Iraq, Iran, ... taking our dollars. Ouch. I take back that hope of abundant food.

Nevermind. I'd better cut this post off, before I get depressed again :(.

walenk
10-27-08, 07:01 PM
Good read. Thanks.

When you anticipate that the transition is not trade-able, are you saying you doubt it can be traded for big profits, or are you saying that it cannot even be traded for wealth preservation?

I can imagine that the purchasing power of the dollar for foreign goods (whether Wal*Mart or BMW) could collapse chaotically, but I'm at a loss to imagine that the purchasing power of the dollar for domestic


goods (do we still make anything?),
services (plenty of those),
energy (that's going to hurt, granted), and
food (that we can still produce in abundance, I hope)

could be cut in half chaotically.

Hmmm ... well the food from our "industrialized" big-ag depends on petro, which depends on our good friends in Venezuala, Russia, Saudi Arabia, Iraq, Iran, ... taking our dollars. Ouch. I take back that hope of abundant food.

Nevermind. I'd better cut this post off, before I get depressed again :(.

Big Ag needs petro to grow and to ship. No petro, no ship, all same. Yes, they have no bananas (read wheat).

ThePythonicCow
10-27-08, 07:38 PM
Big Ag needs petro to grow and to ship. No petro, no ship, all same. Yes, they have no bananas (read wheat).Yup.

On the bright (less dark) side, we still produce some of our own energy. I'd guess we could still import energy as well, just at exhorbitant prices. Anyone employable in domestic energy production would have a job.

Perhaps we can think of this as "what would happen if oil jumped to $400/barrel, and stayed there?"

For most of us, life would go on, with adaptions and hardships. Those caught in the wrong place, at the wrong time, with too few reserves, could be in serious trouble.
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marvenger
10-27-08, 08:33 PM
The 1930s deflation spiral ended abruptly in 1934 when FDR took the US off the gold standard and devalued the dollar against gold. And–this is key–there has never been once since in any country. Ever.


The critical take-away is that we are indeed experiencing short term deflation. We call it disinflation here in the context of Ka-Poom Theory to keep readers from confusing the process with the start of a deflation spiral–which cannot happen under and floating exchange rate, fiat money system. The only way if could is if governments around the world all got together and decided to crash the global economy. That strikes us as unlikely. More likely one or more will move to reflate using currency devaluation.

If the Fed so desired the US could have 100% inflation by the middle of 2009 as the US did in 1946. All that is needed is for Congress to borrow a few more trillion into existence to fund old and new liabilities and have the Fed print it because our government cannot borrow the money from overseas or raise taxes, or devalue the dollar, or both.




There's still something that makes me feel uneasy about ka-poom and its this; both Hudson and Keen seem to suggest that we've hit a point where more debt cannot be created, the economy cannot sustain it and to me it seems the only way to reflate the economy is to literally print the money and then you end up like Zimbabwe I guess.

One of Keens arguments for the point of no more debt is the fact that there is no one to lend to, they've loaned hundreds of thousands of dollars to individuals with no jobs or assets, this has never happened before and so is maybe an additional point to consider when assuming that no deflation will occur because none has occured since going off gold standard.

If the government just keeps loaning the money into existance then this is just compunding the problem of printing money because there's more interest payments that have to made on revenue that's not there.

So if this view is correct, what really is worse, trashing the economy through hyperinflation or deflation death-spiral? The only guy that seems to enjoy hyperinflation in zim is Mugabe and I don't think the West will be so tolerant of their leaders having access to this kind of abuse of power.

So I guess I'm thinking that a hyperinflation is possible but it won't end up like Zim, something else will happen.

gobears
10-27-08, 08:44 PM
This is an interesting point about trying to reflate the economy when there is nobody to lend too. The reflations that have happened over the past 50 years occurred from overall debt to GDP levels that were much lower than today's numbers. I have no doubt the reflation will eventually occur (it always does, eventually), but the Ka- portion may just last longer and be tougher than most have imagined.

Maybe a way out of the problem is indeed partial monetization of debt?

marvenger
10-27-08, 08:51 PM
Maybe a way out of the problem is indeed partial monetization of debt?


I'm still fairly new to all this, but from what Keen and Hudson say about the economies ability to pay the interest it seems that this is the only option to reflate, but then you end up like Zimbabwe, so I'm trying to decide in this situation which is more evil, the hyperinflation or the death spiral. Hudson seems to want a debt jubilee, that sounds like it may be the way to go.

gobears
10-27-08, 08:59 PM
I guess you can monetize debt without ending up like zimbabwe. Let inflation run in a more controlled way, to get debt/gdp back into line (by boosting nominal GDP without killing real GDP too much).

jk
10-27-08, 09:29 PM
double nominal incomes. the debts then become serviceable and in fact more debt can be undertaken. this requires only 15% income inflation for 5 years.

marvenger
10-27-08, 09:38 PM
yeah I tough time envisioning the US and the world turning into zimbabwe, but once you start monetizing then you're setting yourself onto a fixed track towards that situation I believe, and its bloody hard to get out of the ride. So then the other two options are deflation or some sort of debt jubilee.

Again this is all based on the assumption that the economy cannot sustain the interest payments of more debt, I think EJ is already worried about a massive infaltionary scenario with sudden stop and spike in interest rates, so why would drastically increasing the public debt produce the same result?

Andreuccio
10-27-08, 09:50 PM
The truth about deflation

by Eric Janszen

With all of this panicking into dollars we get asked a lot about deflation. "Why don't you just admit that a 1930s style depression and deflation spiral has begun and soon there will be soup lines and we'll be buying cars for $2,000 and gold will trade at $100."

The reason is that we are 100% certain that dollar appreciation that we call "Ka" as part of Ka-Poom Theory will not turn into a deflation spiral. Cars are not going to cast $2,000 and gold will not go to $200. Here's why.

The essence of Ka-Poom Theory is that after the phony credit-based boom ends, first the dollar rises and inflation falls before dollar repatriation and government reflation policies kick in. We don't think the transition from disinflation to inflation is trade-able because we expect it to be chaotic. But we don't blame readers for trying, or wanting to.


All right, fair enough. Not deflation, disinflation, Poom still coming, but it can't be traded securely.

Can I still bitch and moan about all the money I'm down at this point? :mad: :D

ThePythonicCow
10-27-08, 09:51 PM
Over at http://www.howestreet.com/articles/index.php?article_id=7822 , in a posting entitled "U.S. Dollar Bull Market Update" Nadeem Walayat concludes, if I understand accurately, that there is a Ka, but no Poom, on account of there being no other currency or precious metal that is in a position to replace the Dollar in its Reserve role.

Sure, the Dollar has its problems, but the others have worse problems, except for the Yen, which is well served by supporting the Dollar's Reserve role.

The global recession beginning now strengthens the dollar, as the United States is the last nation on earth likely to collapse into default anytime soon. The recent airlifting of dollars to other central banks further binds the world to the dollar. The central banks, in his view, clearly don't see gold as still having a central role in our currencies. For money to be invested with a five to ten year time span, he suggests energy, agriculture and other commodities, picking up over the next year.

FRED
10-27-08, 10:18 PM
double nominal incomes. the debts then become serviceable and in fact more debt can be undertaken. this requires only 15% income inflation for 5 years.

Exactly right!

Keen and Janszen concluded in their last iTulip discussion that letting wage inflation rip is the only viable medium term political solution to the debt deflation problem. Will the next administration be the one to do the evil dead? It's been shaping up for years.

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

jimmygu3
10-27-08, 10:25 PM
double nominal incomes. the debts then become serviceable and in fact more debt can be undertaken. this requires only 15% income inflation for 5 years.

How can this be accomplished? Policies that create domestic jobs and penalize outsourcers?

marvenger
10-27-08, 10:50 PM
How can this be accomplished?

So options are

1) printing and very nasty Inflation
2) Debt deflation and hope it stops being self perpetuating at some point
3) debt jubilee Hudson style
4) More controled inflation with forced wage increases

I'm with Jimmy in being uncertain with how 4) is achieved

Sidewinder
10-27-08, 11:21 PM
So options are

1) printing and very nasty Inflation
2) Debt deflation and hope it stops being self perpetuating at some point
3) debt jubilee Hudson style
4) More controled inflation with forced wage increases

I'm with Jimmy in being uncertain with how 4) is achieved

I too find this challenging to wrap my head around - perhaps it is because I am an engineer...:confused:

How about:
5) Protectionist stance regarding imports of everything but energy

GRG55
10-27-08, 11:31 PM
Yup.

On the bright (less dark) side, we still produce some of our own energy. I'd guess we could still import energy as well, just at exhorbitant prices. Anyone employable in domestic energy production would have a job.

Perhaps we can think of this as "what would happen if oil jumped to $400/barrel, and stayed there?"

For most of us, life would go on, with adaptions and hardships. Those caught in the wrong place, at the wrong time, with too few reserves, could be in serious trouble.
<!--m-->

Just watch the layoffs in your domestic energy industry [petroleum, coal, nuclear, etc.] through this winter and next year. Engineers and geologists are not needed when capital is no longer being spent.

The old oil patch adage "the best cure for low oil prices is...low oil prices" is going to be visited upon us at what may be the worst possible time, unfortunately.

GRG55
10-27-08, 11:40 PM
Big Ag needs petro to grow and to ship. No petro, no ship, all same. Yes, they have no bananas (read wheat).

Yes, they have no water.
Good call. A bit of wheat for now, but not for long...



Saudi Arabia scraps wheat growing to save water (http://www.reuters.com/article/latestCrisis/idUSL08699206)

Tue Jan 8, 2008 11:02am EST
RIYADH, Jan 8 (Reuters) - Saudi Arabia is abandoning a 30-year programme to grow wheat that achieved self-sufficiency but depleted the desert kingdom's scarce water supplies.

The government will start reducing purchases of wheat from local farmers by 12.5 percent per year from this year, officials from the agriculture and finance ministries said on Tuesday.

The kingdom aims to rely entirely on imports by 2016.

"The reason is water resources," said one official, who did not want to be identified.

Saudi Arabia produces 2.5 million tonnes a year of durum and soft wheat, enough to meet domestic demand...

marvenger
10-27-08, 11:43 PM
I think 5) with less restrictive measures such as allowing various other essentials such as vaccines that aren't produced in the country to be imported will help, but it will only be marginal, there's alreasy an oustanding debt with interest bill fast approaching unpayable if not already there. I can't see spartan lifestyles and working to pay off foreign debts to be a politically workable solution for the US, and rightly so, it wasn't the workers that created this mess.

GRG55
10-27-08, 11:44 PM
There's still something that makes me feel uneasy about ka-poom and its this; both Hudson and Keen seem to suggest that we've hit a point where more debt cannot be created, the economy cannot sustain it and to me it seems the only way to reflate the economy is to literally print the money and then you end up like Zimbabwe I guess.

One of Keens arguments for the point of no more debt is the fact that there is no one to lend to, they've loaned hundreds of thousands of dollars to individuals with no jobs or assets, this has never happened before and so is maybe an additional point to consider when assuming that no deflation will occur because none has occured since going off gold standard.

If the government just keeps loaning the money into existance then this is just compunding the problem of printing money because there's more interest payments that have to made on revenue that's not there.

So if this view is correct, what really is worse, trashing the economy through hyperinflation or deflation death-spiral? The only guy that seems to enjoy hyperinflation in zim is Mugabe and I don't think the West will be so tolerant of their leaders having access to this kind of abuse of power.

So I guess I'm thinking that a hyperinflation is possible but it won't end up like Zim, something else will happen.

I have much less confidence in this regard than you do. :)

Imagine the uproar and resistance from the people and their elected representatives if the US Treasury Secretary was to demand unlimited powers, with specific exclusion from any accountability, under the threat of collapsing the financial system if not granted. That would never happen would it... :rolleyes:

marvenger
10-27-08, 11:53 PM
I'm glad you said it. I have a tough time evisioning zimbabwe but I wouldn't dismiss it altogether either.

GRG55
10-27-08, 11:53 PM
Exactly right!

Keen and Janszen concluded in their last iTulip discussion that letting wage inflation rip is the only viable medium term political solution to the debt deflation problem. Will the next administration be the one to do the evil dead? It's been shaping up for years.

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

Gonna be tough to do this with the unemployment rate having hit an inflection and now rising. Show me an employment position in the USA [outside of Treasury Secretary and his close friends :rolleyes:] that has the pricing power to pass on even nominal wage increases.

Only thing that comes to my mind is employees of the Federal Government. Perhaps that's where it starts. And perhaps for the first time in maybe 40 years it becomes cachet to seek a government job? Let's face it, that's the only sector that can "create" the money to pay the wages, benefits and pensions with any degree of security for the recipient.

marvenger
10-27-08, 11:58 PM
socialism....for a while maybe?....until its stable enough to get the private economy going again

kartius919
10-28-08, 02:26 AM
Why is there no other currency or precious metal that is in a position to replace the Dollar? His logic is very flawed and outright dangerous. Don't accept his conclusions for face value. For example, he claims that the short term decline in gold prices indicates it has failed to serve as the global currency. First, he does not address the longer term rise in gold prices. Second, he fails to show how market prices of a derivatives product has any bearing on global monetary policy. He oversimplifies the debate and comes to oversimplified answers.

Even assuming that the other world currency collapses before the US dollar, why does he assume that the US dollar won't collapse along with the rest of the fiat?

I rather place my trust in ITulip than the blowhard.

ThePythonicCow
10-28-08, 03:14 AM
First, he [Nadeem Walayat, I presume, mentioned in an earlier post of mine above] does not address the longer term rise in gold prices.What long term rise? Gold is about the same price it was nearly thirty years ago ;).

Or, less flippantly, gold did rise from 2001 to early 2008, but one could claim that rise was because commodity prices in general were rising then, thanks to the last great massive overdose of liquidity from our retired Monetary Drug Lord, Mr. Greenspan.

Or by "long term" did you mean last century, not last few years? Pretty clearly breaking the bonds between gold and our various world currencies led to that change.



I rather place my trust in ITulip than the blowhard. <!-- / message --> <!-- controls -->
Yeah - well yes - ok.

ThePythonicCow
10-28-08, 03:27 AM
socialism....for a while maybe?....until its stable enough to get the private economy going againI don't think that the state change between socialism and free market capitalism is like that between water and ice, refreezing what has melted.

I think it is more like the reverse of the state change between dynamite and the acrid smoke and fine powder residue of an explosion.

It is rare for the political dynamite even needed to form something like the United States to form in the evolution of human civilization. Once we lose what our founding fathers deeded us, writ in their blood and vision, it might never be seen again on this planet, or it might take another thousand years.

(Sorry, the chemical and political metaphors above are so entwined that not even I know for sure how to unravel them ... don't think about this post too hard.)

kartius919
10-28-08, 04:14 AM
I was responding to the fallacies in his argument. I am not saying that the rise in gold indicates the adoption of a gold backed currency. His argument is based on the assumption that the price of the gold contract is an indicator of acceptance of gold as a global reserve currency. This must be true in order for him to make the claim that the decrease in the price signals that it has failed or rather the world has rejected its use as a global currency. If his assumption is true (which it is clearly not) then he does not take into account the rise in gold. He is playing around with the time frame to select a period that best suits his argument.

Gold is what it is. A limited metal that the world has at one point or another used as method of exchange. I am simply stating that the guy is a talking out of his ass and no one should listen to him unless he clarifies his arguments.

ThePythonicCow
10-28-08, 04:22 AM
Though my style of writing doesn't always convey it, I am less certain that I know what is and what is not, gold or otherwise.

Like the food I eat, I take in a variety, trying to stick to what seems healthy, and let my body, or in the case of thoughts, the hidden corners of my mind, make of it what it will.

So ... I would be less quick to dismiss Nadeem Walayat with a wave of my paw as you've done, though I can't claim to defend him either.

marvenger
10-28-08, 04:28 AM
this is why I'm nervous about the relatively orderly thesis of ka-poom. It seems that printing is needed to finance public deficits, and then the cure for zimbabwe style disintegration is wage increases; but how on earth does that happen? Profits are going to be hard to come by and in a capitalists system its hard to see employers giving more money to employees to prop up the entire system, they want to be the few that gets away with not increasing wages. So i don't think wages will rise enough and there will not be enough real demand and, ok maybe zim is going too far but you get something very nasty indeed.

kartius919
10-28-08, 06:38 AM
I dismiss his non-sense because they are non-sense. There is absolutely no analysis in the piece, only statements and claims. I am not an economic expert, but I know bullshit when I see it and wanted to point out to anyone else why I think it is bullshit. You can't give deference to bullshit. Your glib comment was insulting.

kingcopper
10-28-08, 07:26 AM
I don't see a wage inflation in the West's cards simply because of globalism.
I don't see an orderly inflation at all.
I don't see any long term deflation because of 300 million guns in the hands of people on prescription meds.
The American people like it rough and fast.
Thats why I'm starting to believe that we'll all wake up one cold morning to a Bloomberg or CNBC host talking about the added "0" in our currency and many others! By adding a "0" we get a dramatic increase in wages and prices immediately and a dramatic decrease in the value of existing debts.

ThePythonicCow
10-28-08, 08:14 AM
I don't see a wage inflation in the West's cards simply because of globalism. Wage inflation in "real" (basket of foreign currency) money ... I agree that won't happen, for the global wage pressures you note.

But wage inflation in nominal dollars can happen. Lets say first the dollar starts weakening again, sharply, so that all foreign purchased goods (like oil) cost four times what they did. Oil goes to $300/barrel.

Prices at the store, for food and energy and clothing and cars, all quadruple, as we depend so much on foreign energy and manufacturing.

Then one could see wage pressure, with increased Labor Union activism and a Labor Union President Obama, and a doubling of nominal wages.

grapejelly
10-28-08, 09:18 AM
Wage inflation in "real" (basket of foreign currency) money ... I agree that won't happen, for the global wage pressures you note.

But wage inflation in nominal dollars can happen. Lets say first the dollar starts weakening again, sharply, so that all foreign purchased goods (like oil) cost four times what they did. Oil goes to $300/barrel.

Prices at the store, for food and energy and clothing and cars, all quadruple, as we depend so much on foreign energy and manufacturing.

Then one could see wage pressure, with increased Labor Union activism and a Labor Union President Obama, and a doubling of nominal wages.

Real wages have been falling and will continue to fall. The reason isn't global competition. It's the government taking a greater and greater percentage of our productivity through the hidden inflation tax.

You can observe this better when you travel to London. London is very expensive and the living standard isn't very good. That's what we face in the US for a protracted period.

ThePythonicCow
10-28-08, 09:55 AM
Real wages have been falling and will continue to fall. The reason isn't global competition. In some cases, it is global competition. I observed computer programmers doing just as good a job as myself, working on the same stuff (Linux kernel work is all done over the world wide web, by people from many countries and employers), getting paid 20% of what I got paid.

That won't last.

I suspect that automobile assembly line workers are seeing the affects of globalization as well. Which isn't to say that American or British workers are not also seeing the affects of inflation and taxes as well.

Some, such as in London, may be living modestly and paying a high price for it, but many more, across America, have been living above their means.

Yes, real wages are falling. We're probably both right, in that both globalization and excessive taxes and inflation are to blame.

Yaowarat
10-28-08, 10:46 AM
But Mish can't be wrong.

*T*
10-28-08, 11:56 AM
I too find this challenging to wrap my head around - perhaps it is because I am an engineer...:confused:

How about:
5) Protectionist stance regarding imports of everything but energy

How then would you pay for your energy imports?

Dollars? What would they spend those dollars on then?

kartius919
10-28-08, 01:35 PM
I don't think he is wrong per se. He believes that the "disinflationary" period will last much longer than people realize, probably because the US is currently the global reserve currency. He sees the long term as dollar negative. I think the biggest unknowns are a) how long the disinflationary period will last and b) political/economic/military response to the crisis. A global even proxy will destroy the world for decades even centuries. Hope that we will have sensible world leaders in the future and absolutely not a neocon puppet such as McCain/Palin.

metalman
10-28-08, 03:13 PM
I don't think he is wrong per se. He believes that the "disinflationary" period will last much longer than people realize, probably because the US is currently the global reserve currency. He sees the long term as dollar negative. I think the biggest unknowns are a) how long the disinflationary period will last and b) political/economic/military response to the crisis. A global even proxy will destroy the world for decades even centuries. Hope that we will have sensible world leaders in the future and absolutely not a neocon puppet such as McCain/Palin.

that's james k not his dad john k. ej interviewed him nov. 06. (http://www.itulip.com/forums/showthread.php?t=654) wasn't all that impressed, to be honest.

labasta
10-28-08, 05:51 PM
Good read. Thanks.

When you anticipate that the transition is not trade-able, are you saying you doubt it can be traded for big profits, or are you saying that it cannot even be traded for wealth preservation?

I can imagine that the purchasing power of the dollar for foreign goods (whether Wal*Mart or BMW) could collapse chaotically, but I'm at a loss to imagine that the purchasing power of the dollar for domestic


goods (do we still make anything?),
services (plenty of those),
energy (that's going to hurt, granted), and
food (that we can still produce in abundance, I hope)

could be cut in half chaotically.

Hmmm ... well the food from our "industrialized" big-ag depends on petro, which depends on our good friends in Venezuala, Russia, Saudi Arabia, Iraq, Iran, ... taking our dollars. Ouch. I take back that hope of abundant food.

Nevermind. I'd better cut this post off, before I get depressed again :(.

As I understand it, import and export prices cannot be so easily differentiated in the everyday services which we give and receive.

For example, a plumber installing a solar heater in your home. Where are the components made and put together?

The fast food outlet - beef is domestic. What about the chemical additives in the sauce and the rest - Dupont? What about the plastic ketchup bottles - the polysterine cups - the sugar satchets - the uniforms of the servers - the parts of the machines used to make the food which may need to be replaced every now and then - the flourescent light bulbs etc etc.

Now take Dupont, what goods must it import to make those chemical additives? Do you see what I mean? Everything expands back and out a long way - all the way to the cut down forest where the quarry was formed.

So a price rise here makes for a price rise there. Some services are less import intensive and so would experience less of a rise, but everyting must rise to some degree.

labasta
10-28-08, 07:14 PM
I don't see a wage inflation in the West's cards simply because of globalism.
I don't see an orderly inflation at all.
I don't see any long term deflation because of 300 million guns in the hands of people on prescription meds.
The American people like it rough and fast.
Thats why I'm starting to believe that we'll all wake up one cold morning to a Bloomberg or CNBC host talking about the added "0" in our currency and many others! By adding a "0" we get a dramatic increase in wages and prices immediately and a dramatic decrease in the value of existing debts.

Yes, I understand now that governments really can produce inflation on tap if they resort to stuff like that.

I'm not 100% sure they can equate the private debt destruction with public spending. Maybe they can. Maybe they can overshoot it. They can produce inflation on tap if they add zeros lol.

Interesting times ahead that is for sure.

The only real way to get out of this mess is to industrialise. The question of course is how. How can you compete with the Japs and the Germans, and the Chinese slave wage? The US will have to find a way. One that doesn't involve empire.

I read a long time ago that the reason for the Japanese creaming the Americans in terms of technology was because their government invested their revenue in their own companies in research and development and with subsidies etc. The Americans invested their money in their military which while having a few trickle down breakthoughs in technology could not compete with the Japanese.

Moral of the story: the military/industrial complex must die. The military must be massively reduced.

Now, that is easier said than done. Whatever happens in the meantime, will just make the situation worse (whatever it is, argue amongst yourselves). I believe the US will do all that it can to stop that happening. The US will become very reckless and dangerous in the world as they retract kicking and screaming like a child until the cancer dies and a new world is born.

Oooh, sounds dramatic yeah :)

Sounds like a drug addict going cold turkey. Just get out of his way!

friendly_jacek
10-28-08, 07:21 PM
A quick and simple question for smart itulipers.
If printing $ is so easy as often hinted on itulip, why this deflation (I'm sorry, disinflation) was allowed to happen just before the elections, cratering all possible assets and creating a huge misery for US citizens?

If helicopter Ben had it all figured out and planned, why this financial fiasco reached these proportions?

Another related question. If some of the recent action on the stock markets was caused by margin calls and forced liquidations and redemption that became worse as the nominal priced went lower and lower, why this is not a deflationary spiral?

If the WMD derivatives started to implode, doesn't it create a chain reaction with more deflationary implosions?

Finally, if the future earnings go down in 2008/2009 due to credit squeeze/bursting or higher dollar or record low sentiment ratings and generate more stock selling and more margin calls, why it would not be a spiral action?

In simple words please!

I've heard so much about "printing dollars" story that I don't believe it's true anymore. Most money in modern societies is credit (isn't it 90%?). Didn't EJ declare start of credit destruction in 2007 (one of the best calls in itulip IMHO)?

Jesse
10-28-08, 07:25 PM
Well reasoned.

Thank you for this.

metalman
10-28-08, 07:35 PM
Well reasoned.

Thank you for this.

you 'the' jesse of http://jessescrossroadscafe.blogspot.com?

like your site for the same reason i like ej's... well reasoned arguments backed up with with e.v.i.d.e.n.c.e. not hand waving and diatribe.

sadsack
10-28-08, 07:49 PM
A quick and simple question for smart itulipers.
If printing $ is so easy as often hinted on itulip, why this deflation (I'm sorry, disinflation) was allowed to happen just before the elections, cratering all possible assets and creating a huge misery for US citizens?

If helicopter Ben had it all figured out and planned, why this financial fiasco reached these proportions?

Another related question. If some of the recent action on the stock markets was caused by margin calls and forced liquidations and redemption that became worse as the nominal priced went lower and lower, why this is not a deflationary spiral?

If the WMD derivatives started to implode, doesn't it create a chain reaction with more deflationary implosions?

Finally, if the future earnings go down in 2008/2009 due to credit squeeze/bursting or higher dollar or record low sentiment ratings and generate more stock selling and more margin calls, why it would not be a spiral action?

In simple words please!

I've heard so much about "printing dollars" story that I don't believe it's true anymore. Most money in modern societies is credit (isn't it 90%?). Didn't EJ declare start of credit destruction in 2007 (one of the best calls in itulip IMHO)?

While EJ has not IIRC explicitly named the bolded item as the trigger, at least one of the "smart itulipers" has mentioned that CDS settlements/defaults over the next few months are a possible milepost.

I.e., if derivatives tank -> chain reaction of deflationary implosions -> the fed would presumably be forced to inflate by any means (AKA monetization) necessary

metalman
10-28-08, 08:09 PM
While EJ has not IIRC explicitly named the bolded item as the trigger, at least one of the "smart itulipers" has mentioned that CDS settlements/defaults over the next few months are a possible milepost.

I.e., if derivatives tank -> chain reaction of deflationary implosions -> the fed would presumably be forced to inflate by any means (AKA monetization) necessary

the question is like asking, if the fed can't put out the fire in the whorehouse with water (discount window tricks), why don't they just use dynamite (monetization and/or devaluation)?

answer: because they don't want to use dynamite and will keep using water as long as they think they have a frigging prayer. oh, and they still think it's an orphanage... similar kind of screaming.

ASH
10-28-08, 08:49 PM
I read a long time ago that the reason for the Japanese creaming the Americans in terms of technology was because their government invested their revenue in their own companies in research and development and with subsidies etc. The Americans invested their money in their military which while having a few trickle down breakthoughs in technology could not compete with the Japanese.

Moral of the story: the military/industrial complex must die. The military must be massively reduced.


I wouldn't say that Japan "creams" America in terms of technology, although they are indeed very good. The emphasis of Japanese R&D has tended to be on product development rather than pure science. My understanding is that the Japanese business climate is not supportive of startup companies, and tends to favor a handful of giant corporations. Within a company, there's not much scope for creative underlings to pursue ideas other than those of their superiors. This in not a climate that leads to many breakthroughs, but rather a whole bunch of regimented crank-turning. That's why new technology is less likely to be invented in Japan than it is to be perfected there.

I think the Japanese have a national genius for quality, design (in the aesthetic, non-technical sense), and attention to detail. On top of this, the government support you cite does help a lot. However, the rewards for original thinking and high-performing individuals are worse in Japan than in the States. Consider the case of Shuji Nakamura, who invented the blue laser diode (of blu-ray fame) for Nichia Corp. Although he was eventually awarded $8 million as the result of a lawsuit, the original bonus awarded by Nichia for this invention was about $200 (link (http://findarticles.com/p/articles/mi_qa5350/is_200505/ai_n21372110)). Nakamura left Japan to become a professor at UC Santa Barbara in the United States (at the time, I was a graduate student in the first academic research group to produce a blue diode laser, although I was working on a different type of diode laser at the time).

[BEGIN RANT]

In my opinion, you guys who talk about a military industrial complex are stuck in the 50's, when military spending dominated the federal budget. See Table 3.1 (http://www.whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf) from the Historical Tables published by OMB:


1950 32.2%
1951 51.8%
1952 68.1%
1953 69.4%
1954 69.5%
1955 62.4%
1956 60.2%
1957 59.3%
1958 56.8%
1959 53.2%
1960 52.2%

1997 16.9%
1998 16.2%
1999 16.1%
2000 16.5%
2001 16.4%
2002 17.3%
2003 18.7%
2004 19.9%
2005 20.0%
2006 19.7%
2007 20.2%

Yes, we spend an awful damn lot of public money on the military, and yes -- the defense industry does have effective lobbyists. Neither do I dispute that defense R&D dollars would be more productive of civilian technology if spent directly on basic R&D. However, the phrase "military industrial complex" was coined in an era where public spending on the military was MUCH larger (both as a percentage of total spending, and as a percentage of GDP) than it is today. Influence of the defense industry over public spending was probably also a lot greater. Personally, I scope that political influence as a lot more like the farm lobby than like the freakin' Illuminati. If the defense industry lobby was really effective enough to warrant its own sinister moniker, ask yourself how the peace dividend at the end of the Cold War was realized so easily -- with the attendant contraction and consolidation of the defense industry. In 1988, defense spending hit a local maximum of 27.3% of total spending (5.8% of GDP); ten years later, in 1998, defense spending had fallen to a low of 16.2% of total spending (3.1% of GDP -- almost half!). My point is that if you really look at the history, Ike had a legitimate point about the military industrial complex being something of ominous size and influence, but defense spending has shrunk INCREDIBLY since then, and it is a matter of historical record that the defense industry lacks the political power to keep defense spending high during tranquil times.

Before you demand an end to the defense industry and defense R&D spending, you need to ask yourself this: If public money isn't spent on defense R&D, do you think it will necessarily be spent on civilian R&D, or will it instead go to yet more payments to individuals (22.2% of outlays in 1957; 61.9% of outlays in 2007 -- from Table 6.1 of the Historical Tables referenced earlier). The way I see it, you can get a lot more votes for "defense" anything than you can "pure science" -- just look at how little we spend on NASA or high energy physics, etc. If we cut defense R&D spending, the money isn't going to end up in civilian R&D spending -- it will end up in civilians! There are some other things to consider, too: The defense industry actually builds stuff -- better stuff than anyone else in the world, and stuff that we can (selectively) export. If we're all fired up to "re-industrialize", how much sense does it make to demonize a manufacturing industry that can't be out-sourced, that promotes scientific advancement, and that is one of a very few things that America is still good at?

[/END RANT]

P.S. Feel free to flame. I realize the topic of defense versus social spending -- and the defense industry in general -- is rather incendiary; I won't take it personally.

P.P.S. I'm ethnically half-Japanese, and almost all of my company's business originates from defense R&D spending, so obviously I have a horse in this race.

metalman
10-28-08, 09:21 PM
no industry on the gov't tit for 50 yrs still needs a lobby. the mil industry is part of the gov't at this point with a guaranteed 20% entitlement.

donalds
10-28-08, 09:27 PM
We have an inflated number of retail stores today. That number will deflate.

Unemployment will increase, access to credit will decrease, purchasing power will decrease.

With increasing store closures, fewer stores are available to service the same number of people who have fewer dollars to spend.

Yet, following your reasoning here, it would seem fewer stores mean fewer goods available to sell to buyers who are able to buy less and less. So prices will inflate?

Prices for what? Certainly not for those goods that are not needed. Supply shortages may come about, resulting in higher prices for goods needed (as opposed to goods wanted), but that will be due to international trade breakdowns. It won't be the result of fewer stores that are more crowded.

Guess I'm missing something here, or my suspicion that the argument for inflation has now gotten to the point of reaching . . . for an explanation in the face of overwhelming evidence to the contrary.

The inflationary argument ultimately rests on the 'belief' that dollar printing will exceed credit deflation, deflation of purchasing power, deflation of jobs, deflation in the means of production, deflation in the velocity and amount of dollars circulating, on and on.

Such a 'belief' rests firmly in the assumption that government power exceeds that of all else, including what is happening in the 'real' global economy.

metalman
10-28-08, 10:18 PM
We have an inflated number of retail stores today. That number will deflate.

Unemployment will increase, access to credit will decrease, purchasing power will decrease.

With increasing store closures, fewer stores are available to service the same number of people who have fewer dollars to spend.

Yet, following your reasoning here, it would seem fewer stores mean fewer goods available to sell to buyers who are able to buy less and less. So prices will inflate?

Prices for what? Certainly not for those goods that are not needed. Supply shortages may come about, resulting in higher prices for goods needed (as opposed to goods wanted), but that will be due to international trade breakdowns. It won't be the result of fewer stores that are more crowded.

Guess I'm missing something here, or my suspicion that the argument for inflation has now gotten to the point of reaching . . . for an explanation in the face of overwhelming evidence to the contrary.

The inflationary argument ultimately rests on the 'belief' that dollar printing will exceed credit deflation, deflation of purchasing power, deflation of jobs, deflation in the means of production, deflation in the velocity and amount of dollars circulating, on and on.

Such a 'belief' rests firmly in the assumption that government power exceeds that of all else, including what is happening in the 'real' global economy.

travel much? visit a few countries where wages are not keeping up with prices that are set by not your currency.

defomcduff
10-28-08, 10:26 PM
EJ,

I agree that we ought to be skeptical of governments that hold the power of the printing press. They will always choose inflation in the end.

In some ways, isn't inflation via fiscal stimulus (with borrowed money) what you argued for in "No Time for Utopian Anti-Interventionism", so that the U.S. might avoid another truly deflationary Great Depression?

Investing aside, do you have an opinion on whether the U.S. *should* be on a gold standard? Can an inflationary policy be socially beneficial? It seems so if a deflationary depression is an unacceptable outcome.

- DeForest

labasta
10-28-08, 10:40 PM
Ash, you won't get flamed by me. You make some valid points and yes I had thought you must have connections to the "defence" (I love that definition) industry.

I actually think I saw a documentary on the Japan/American thing. I had myself figured that it is strange that the Japs have this dominant tech industry and yet I also know them to be lacking "creative" skills where inventions are concerned. The borg mentality and all that. I was always told as a kid that a Westerner invents the product and the Japanese take it, develop it and then flood the market in as anti-competitive way as possible. Similar to the Chinese. I remember reading about an Israeli weapons producer who told his sales manager when going to a trade fair in Taipai to never leave the sample gun with them for too long as they could copy anything in 48 hours. lol.

Sure, there's money in Intellectual Property, but it's not where employment lies is it? People still need to make the stuff, or do machines? Is this Zeitgeist Addendum all over again.

20% of a non-outsourced industry would be good on the face of it, but as I have understood it, this industry is supporting the FIRE economy which is now ending. The brains of this industry needs to turn to something else to get the US beyond the FIRE. Don't ask me what though. The change is too great for the politicos to do this willingly. Politicians won't change a thing unless forced in my opinion. Kind of sad really, when you think of it.

It's good to have a rant now and again, hell, I do. Unsubstantiated or not lol. :D

EJ
10-28-08, 10:47 PM
EJ,

I agree that we ought to be skeptical of governments that hold the power of the printing press. They will always choose inflation in the end.

In some ways, isn't inflation via fiscal stimulus (with borrowed money) what you argued for in "No Time for Utopian Anti-Interventionism", so that the U.S. might avoid another truly deflationary Great Depression?

Investing aside, do you have an opinion on whether the U.S. *should* be on a gold standard? Can an inflationary policy be socially beneficial? It seems so if a deflationary depression is an unacceptable outcome.

- DeForest

Politicians learned from the 1930s that "depressions are bad," and from the 1934 experiment that they can be "prevented." All you need is a guaranteed source of demand. Keynes is no doubt rolling in his grave at the abuses that his brilliant ideas have been subjected to by politicians. He was an intellectual, and like many–such as Greenspan–naive. He expected politicians to remove stimulus after crisis passed.

In the end it's all jocks and geeks I suppose–authoritarian, or otherwise.

Did you know there has not been one recession in China in 30 years? Wonder what they'd do if one threatened?


http://www.iiasa.ac.at/Research/SRD/images/figures/fig_gdp_1.gif

Contemptuous
10-29-08, 12:31 AM
Did you know there has not been one recession in China in 30 years? Wonder what they'd do if one threatened?

Came across this intriguing remark about China growth going forward, from one Felix Zulauf, one of the foremost fund managers in Europe. He's been prospering this year apparently.

Swiss Guru Braces for Soft Economic Depression

In 1990, Felix Zulauf founded Zulauf Asset Management AG in Zug, Switzerland. He currently manages money for global investors in the Zulauf Europe Fund, which is actually profiting during this disastrous year. Zulauf was bearish starting in 2006 and positioned his funds accordingly. He's been compared to Marc Faber in the consistency of his astute calls.

He implies precisely the same thing regarding China's growth trajectory, as EJ mentions - that people underestimate the extent to which China's internal growth is simply "administered". Read Zulauf here, casually mentioning that China's growth simply "resumes" somewhere out in mid 2009.

While many iTulipers take it for granted we are staring an utter global collapse and a US (and EU) led "global depression" in the face, that aparently does not encompass the full extent of Zulauf's assessment, and indeed it seems he would cast a skeptical eye on the notion of unmitigated gloom for global growth in all quarters.

We may see it otherwise, but look what he's writing:

<<COMMODITIES China will do everything it can to boost domestic consumption and might experience a mild recession, claims Zulauf. Until China's economic growth accelerates in mid-2009, commodities will remain under pressure. >>

How are you supposed to stage a respectable "global depression" if China ignores the idea that all economies are supposed to lie down here and simply languish and expire like starved mutts? If Zulauf is correct, there is a gap or mis-estmation in our understanding of the next decade's trajectory for China's growth. According to this reputedly very astute fund manager, they simply have "other plans".

This does not mean we can't see some horrific currency blowups elsewhere, but summarily counting the motor of East Asia's growth out on the strength of the implosion of the US is a thesis still in search of it's full validation. If a serious recession threatened China it would appear Mr. Zulauf figures they have substantive internal growth cards yet to play.

And BHP Billiton is going for a song these days. Down in the sub-sub-basement, and thoroughly shunned. But for how long?

ASH
10-29-08, 01:47 AM
Ash, you won't get flamed by me.

...

It's good to have a rant now and again, hell, I do. Unsubstantiated or not lol. :D

Thanks for being understanding, friend. :)

I think you're right about the limited employment potential of defense spending. Skilled workers do build the weapons, and those are generally good jobs, but as we develop more and more capable weapons (higher tech) we also build fewer of them. I think that reduces the size of the manufacturing workforce that is required. It seems like someone must have done the analysis already, but I have not yet found a good reference that tracks jobs per defense dollar over history; I'd be very interested in those numbers. Other areas of high tech outside the defense industry have a similar problem -- even when there's fairly high-volume manufacturing, it can be done overseas (because not secret), so the potential for lots of good domestic manufacturing jobs is limited.

I'm not sure about the ties between the defense and FIRE industries. My immediate impression is that General Electric and General Motors are tied more directly into the FIRE economy than General Dynamics -- perhaps because the defense industry has a captive source of income in the form of public defense spending, and so didn't need to dabble as much in the FIRE economy to turn a profit (the way our non-defense industrial companies did). Of course, there is the obvious relationship through government borrowing, and I think the idea of a substantial indirect tie to the FIRE economy, with American military power underpinning dollar hegemony, is useful to a point. That latter dynamic is kind of a chicken-and-egg problem: our military spending is mainly enabled by the dollar hegemony it supports, because it allows us to borrow cheaply. Looking at the recent policies of our government, I get the distinct impression that there is no coherent defense of dollar hegemony, but rather a defense of the status quo which happens to support dollar hegemony. Yes -- minor and gradual threats to dollar hegemony are met with military force (e.g. Gulf War I) or military spending (e.g. limited missile defense) when the status quo is threatened, yet we follow economic policies which seem destined to undermine the dollar's reserve currency status in the long run. (If the dollar emerges stronger from this crisis after a matter of years, then I will doff my cap to Symbols and phirang, adjust my world view to match theirs, and consider myself "schooled".) Likewise, if World War III actually results from an American attempt to defend dollar hegemony or directly seize physical assets like oil wells (confiscating the resource as opposed to safeguarding access to it at market prices), I will salute those of you who are predicting this. My own position is that if there is a sudden collapse of the dollar, or if it ceases to be the medium of international trade, then we will not be in a position to re-impose dollar hegemony at the tip of a sword, because we won't be able to pay for sustained military operations. I also think that public sentiment would prevent a war of conquest from occurring at first, and by the time hard living brings public sentiment around to the idea of just taking what we want, we will no longer have the strength to do so.

Here's a hopeful closing thought. The technical skills and capital resources required for defense research and production aren't so specialized that they cannot be used for other ends. "Defense" contractors are really just big high-tech engineering firms. If a lot of public money gets channeled into energy security or climate engineering or certain technology-intensive categories of infrastructure, then I think we'll find "defense" contractors bidding on those new contracts, and positioned fairly well to win some of them. Even though the defense industry has considerable political clout, the ultimate purpose of that clout is to suckle at the teat of government spending -- not specifically to foment wars and sell crib-seeking missiles. Thus, I don't think the defense industry's lobby would prove a significant barrier to shifting public resources from defense procurement to civilian projects, provided the government pork continued to flow.

[And I apologize for shamelessly drifting off the topic of deflation.]

VIT
10-29-08, 02:18 AM
My own position is that if there is a sudden collapse of the dollar, or if it ceases to be the medium of international trade, then we will not be in a position to re-impose dollar hegemony at the tip of a sword, because we won't be able to pay for sustained military operations. I also think that public sentiment would prevent a war of conquest from occurring at first, and by the time hard living brings public sentiment around to the idea of just taking what we want, we will no longer have the strength to do so.


I agree in the idea, but would not rely too much on "public sentiment would prevent a war of conquest" :D This happened all the times in the past and going on today. States start the war when they are strong, not wait for the weakness. And I could not remember any war which have been announced as conquest (maybe in ancient times there were some). It is always "fair" war for faith, defense, freedom, communism, democracy etc. You just need to shape the landscape (it is especially easy to do in these "crisis" days). I believe in, as you say, cost and nuclear weapon most likely will prevent the big war, but not many local wars like in Iraq. If US would like to "secure control" let say on oil supply in mid Asia and/or Africa nobody can prevent this. US would even share some of the benefits with allies to avoid excessive noise.

I am still optimistic, but my idea we need to keep in mind some other outcomes. This might prevent them from coming in reality when it will be too late.

labasta
10-29-08, 10:38 AM
<<commodities>China will do everything it can to boost domestic consumption and might experience a mild recession, claims Zulauf. Until China's economic growth accelerates in mid-2009, commodities will remain under pressure. >>
</commodities><commodities>


That's what I would expect China to do. What else can it do? Incease exports to areas outside EU and US. I would have thought this would be difficult. Where else is there? India. China must go domestic. Then again, that's what every country will try to do I imagine, the question is in what way.
</commodities>

FRED
10-29-08, 11:07 AM
<commodities>


That's what I would expect China to do. What else can it do? Incease exports to areas outside EU and US. I would have thought this would be difficult. Where else is there? India. China must go domestic. Then again, that's what every country will try to do I imagine, the question is in what way.
</commodities>

We have made the point for the past few years that when US recession came, the next impact on China's exports will be much less significant than is commonly assumed. China trades far more within Asia than it does with the US and Europe combined. In 2006 US exports to the US was 31% of total, now it is even less, closer to 25%. If we cut our imports from China by 20%, that will only cause China's total exports to fall by only 5%. They may be able to make up the difference via increased exports within Asia and by boosting domestic consumption.


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

Atlas
10-29-08, 03:05 PM
"answer: because they don't want to use dynamite and will keep using water as long as they think they have a frigging prayer. oh, and they still think it's an orphanage... similar kind of screaming."

Made me laugh Metalman.

BobH
10-29-08, 05:42 PM
That seems like a streach concidering where Japan, Korea, and others are at currently! When Asian Imports vs. Exports are close in dollars, cna they expect the same growth considering this global recession?

brucec42
10-30-08, 12:53 PM
A quick and simple question for smart itulipers.
If printing $ is so easy as often hinted on itulip, why this deflation (I'm sorry, disinflation) was allowed to happen just before the elections, cratering all possible assets and creating a huge misery for US citizens?

If helicopter Ben had it all figured out and planned, why this financial fiasco reached these proportions?

Another related question. If some of the recent action on the stock markets was caused by margin calls and forced liquidations and redemption that became worse as the nominal priced went lower and lower, why this is not a deflationary spiral?

If the WMD derivatives started to implode, doesn't it create a chain reaction with more deflationary implosions?

Finally, if the future earnings go down in 2008/2009 due to credit squeeze/bursting or higher dollar or record low sentiment ratings and generate more stock selling and more margin calls, why it would not be a spiral action?

In simple words please!

I've heard so much about "printing dollars" story that I don't believe it's true anymore. Most money in modern societies is credit (isn't it 90%?). Didn't EJ declare start of credit destruction in 2007 (one of the best calls in itulip IMHO)?

I'll take a swing at it.

1. There are limitations even on politicians on what the public and foreigners will swallow. The old frog in the pot thing applies. If they announced "the US govn't will pay off all mortgages in the USA and hand everyone $50,000 to pay off car loans and credit cards" the world would have reacted quite differently. Instead of fleeing TO the dollar they would have dropped it. So while NOMINAL stock prices and home prices wouldn't fall, the real buying power of those dollars would, so that your $500,000 home would be paid off but the proceeds might not even buy you a nice car.

2. Ben does NOT have it figured out. This so called fiasco is nothing compared to what's coming down the pike due to his mismanagement of it.

3. Because dollars lost are being replaced via the printing press. Or did you think we had this "bailout money" sitting in a piggy bank somewhere?

4. I have No idea on the CDS effect on things. But it sounds scary.

5. All systems eventually reach a point where they level out. Otherwise, every market movement would be like a nuclear chain reaction. It's knowing where that stabilized point comes that makes people wealthy.

6. If you can't see "money printing" when the government can't even meet its obligations now and hasn't been able to balance a budget honestly since the 60's maybe, and yet is "lending" Trillions to organizations, individuals, and states, with more promises to come, I can't say much more. $60 trillion in unfunded future obligations plus trillions more coming down the pike says they will print money rather than default or cut spending drastically (which they can't, it's mathmatically probably gone too far) and get strung up in the streets by angry retirees and other dependents.

FRED
10-30-08, 02:44 PM
A quick and simple question for smart itulipers.
If printing $ is so easy as often hinted on itulip, why this deflation (I'm sorry, disinflation) was allowed to happen just before the elections, cratering all possible assets and creating a huge misery for US citizens?

If helicopter Ben had it all figured out and planned, why this financial fiasco reached these proportions?

Another related question. If some of the recent action on the stock markets was caused by margin calls and forced liquidations and redemption that became worse as the nominal priced went lower and lower, why this is not a deflationary spiral?

If the WMD derivatives started to implode, doesn't it create a chain reaction with more deflationary implosions?

Finally, if the future earnings go down in 2008/2009 due to credit squeeze/bursting or higher dollar or record low sentiment ratings and generate more stock selling and more margin calls, why it would not be a spiral action?

In simple words please!

I've heard so much about "printing dollars" story that I don't believe it's true anymore. Most money in modern societies is credit (isn't it 90%?). Didn't EJ declare start of credit destruction in 2007 (one of the best calls in itulip IMHO)?

December 2007 we called the start of the Debt Deflation Bear Market with a 40% plus decline in 2008 ala the Nikkei in 1990 and for similar reasons: all of the leverage was about to vaporize.

Ka-Poom Theory says that the short term impact is deflationary, but we call it disinflation to distinguish the process from the self-reinforcing process of a deflation spiral ala 1930s, which as we explain here, has never happened since, not even in Japan where deflation has never exceeded -2% in an quarter since 1995, a far cry from the -30% quarterly deflations that occurred under the gold standard.

Ka-Poom Theory says that the Fed and Treasury will reflate by radical means, including outright purchases of assets. I'll remind readers that this forecast was widely derided by the deflationsitas as "impossible" because it violates the Fed's charter. We said the Fed was planning to throw the charter out the window, and they did.

Ka-Poom Theory says the Fed can theoretically expand its balance sheet infinitely, and it has demonstrated over the past year that it can and will.

Ka-Poom Theory says that should all the myriad creative reflation measures fail there is always the "foolproof" way to end deflation: currency depreciation ala 1934.

So now we have the Fed buying the bonds of other countries (http://www.bloomberg.com/apps/news?pid=20601086&sid=aM_hqkOb4c2M&refer=news) such as Brazil, denominated in the local currency, the Brazilian real, in order to devalue the dollar and manage the real up. Direct result is high demand for reals versus dollars. The chart shows the dollar falling against the real.


http://www.itulip.com/images/dillarvsbrazilpes0010108-103008.gif


The indirect result of these purchases and swap agreements with several countries simultaneously is to scare dollar longs. Net result? Dollar down against major currencies as the chart above show.



Currency depreciation is inherently inflationary. The Fed is attempting to reset inflation expectations upward. It appears to be working:
Oil prices head towards $US70

October 30, 2008 02:23pm

WORLD oil prices neared $US70 a barrel in Asian trade today, extending gains after a cut in US interest rates powered a rally in global stock markets.
<!-- // END article-title ************************************** --><!-- // story-tools ************************************** --> <!-- // END article-title ************************************** --><!-- // article intro ************************************** --> The jump in oil prices was widely reported as due to the rate cut versus the impact on the dollar of the rate cut plus the debt swap based currency intervention.
Dollar, Yen Fall as Rate Cuts, Stock Rally Boost Risk Appetite

Oct. 30 (Bloomberg) -- The dollar and the yen fell as a wave of global interest-rate cuts sparked a rally in Asian stocks, bolstering demand for higher-yielding assets.

The greenback slid for a third day against the euro after the Federal Reserve reduced its target lending rate to the lowest in half a century.
So much for the idea that the US government can't send the dollar down to raise inflation expectations.

This is trick number #27 in the endless bag of tricks that governments can dig into sans gold standard.

The deflationistas will have to hang it up one of these days. They are running out of excuses.

Andreuccio
10-30-08, 04:01 PM
Ka-Poom Theory says that the short term impact is deflationary, but we call it disinflation to distinguish the process from the self-reinforcing process of a deflation spiral ala 1930s, which as we explain here, has never happened since, not even in Japan where deflation has never exceeded -2% in an quarter since 1995, a far cry from the -30% quarterly deflations that occurred under the gold standard.



How does this reconcile with, (if my math was correct), 35.4% deflation, or disinflation, or antidisestablishmentflation, over, if not a quarter, at least a third, as shown by Finster's FDI?

http://www.itulip.com/forums/showthread.php?p=56637#post56637
(http://www.itulip.com/forums/showthread.php?p=57806#post57806)

friendly_jacek
10-30-08, 04:13 PM
How does this reconcile with, (if my math was correct), 35.4% deflation, or disinflation, or antidisestablishmentflation, over, if not a quarter, at least a third, as shown by Finster's FDI?

http://www.itulip.com/forums/showthread.php?p=56637#post56637


It's semantics. Itulip cornered itself by proclaiming earlier that deflation was impossible in USA. Thus deflation is called disinflation on itulip. That's all.

Andreuccio
10-30-08, 04:29 PM
It's semantics. Itulip cornered itself by proclaiming earlier that deflation was impossible in USA. Thus deflation is called disinflation on itulip. That's all.

Yeah, my question was about the percentages, (35.4%, vs. "a far cry from the -30% quarterly deflations that occurred under the gold standard"), but I guess if we're calling the 35.4% disinflation, then we still could be a far cry from 30% quarterly deflations.

FRED
10-30-08, 04:37 PM
Yeah, my question was about the percentages, (35.4%, vs. "a far cry from the -30% quarterly deflations that occurred under the gold standard"), but I guess if we're calling the 35.4% disinflation, then we still could be a far cry from 30% quarterly deflations.

Everyone who is calling for deflation and is holding gold please raise your hand.

FRED
10-30-08, 04:39 PM
It's semantics. Itulip cornered itself by proclaiming earlier that deflation was impossible in USA. Thus deflation is called disinflation on itulip. That's all.

It is not semantics. No deflation spiral. That has been our position unchanged since 1998.

If this is deflation why is oil still trading at 300% of the price it was at during the last deflation?

Shouldn't oil be at, say, $5 if deflation is -40% or whatever number is being thrown around?

The Internets, they are filled with nonsense.

Andreuccio
10-30-08, 05:12 PM
It is not semantics. No deflation spiral. That has been our position unchanged since 1998.

If this is deflation why is oil still trading at 300% of the price it was at during the last deflation?

Shouldn't oil be at, say, $5 if deflation is -40% or whatever number is being thrown around?

The Internets, they are filled with nonsense.

Doesn't that just depend on your point of reference? Oil peaked recently at, what, about $140. Wasn't the increase from whatever price it was trading at during the last deflation, up to the peak, counted as inflation?

Gas was 60c a gallon when I was a kid, so even if it dropped to $1.20 you could say we were still in a period of inflation: it would be 2x the price it used to be. But that would ignore the $3 drop and whatever consequences came from it.

I'll take your word for it that there's no "deflation spiral". What do I know? But those last 4 months saw quite a decline, apparently, whether it was deflation on disinflation or whatever.

Contemptuous
10-30-08, 05:16 PM
Liftoff in two years. Until then, possibility of wing-clipping and generalised "deplumage" of the inflationista eaglets. :D

I'm trying to think of an analogy for how deflation gets up any momentum in an all-fiat paper-money world.

Something like a sprinter, trying to get off to a running start while his feet are deep in mud? The idea is this: Deflation needs something "hard" to deflate against. Money against which real deflation occurs must be a "hard surface" so that deflation can get some momentum devaluing things against it. But when money is like a soft, deep sponge, how can deflation gain momentum? It remains "trapped in the mud" because the money is soft and gives way whenever you try to push against it. Plus you have the massive external debt and disappearing lines of credit. ... These deflationists, they are people with formerly razor sharp analysis, and when they get into deflation arguments the analysis gets rubbery and sort of "pliable".


762

763

Andreuccio
10-30-08, 05:19 PM
Everyone who is calling for deflation and is holding gold please raise your hand.

Big difference between calling it deflation and calling for deflation.

FRED
10-30-08, 05:21 PM
Doesn't that just depend on your point of reference? Oil peaked recently at, what, about $140. Wasn't the increase from whatever price it was trading at during the last deflation, up to the peak, counted as inflation?

Gas was 60c a gallon when I was a kid, so even if it dropped to $1.20 you could say we were still in a period of inflation: it would be 2x the price it used to be. But that would ignore the $3 drop and whatever consequences came from it.

I'll take your word for it that there's no "deflation spiral". What do I know? But those last 4 months saw quite a decline, apparently, whether it was deflation on disinflation or whatever.

Yes, here it is, right in the government data.


http://www.itulip.com/images/cpi1980-2008G.gif

Not as severe as in 2002, 2004, 2006 or 2007 but still noticeable.

The pumping is working to maintain the money supply.


http://www.itulip.com/images/MZM2008.gif

friendly_jacek
10-30-08, 05:29 PM
Everyone who is calling for deflation and is holding gold please raise your hand.

Fred, did you know that gold went up during the great depression even though it was a deflationary spiral?

Contemptuous
10-30-08, 05:33 PM
I think I'm going a little batty. I have to remember to stay away from windows today or I may end up jumping out of one.


Fred, did you know that gold went up during the great depression even though it was a deflationary spiral?

Andreuccio
10-30-08, 05:43 PM
Yes, here it is, right in the government data.


http://www.itulip.com/images/cpi1980-2008G.gif

Not as severe as in 2002, 2004, 2006 or 2007 but still noticeable.

The pumping is working to maintain the money supply.


http://www.itulip.com/images/MZM2008.gif



Thanks for the quick replies, Fred. I really appreciate the discourse.

I have a couple of questions on the charts. I'm not trying to be argumentative. I know you're sick to death of talking about deflation. Believe me, at this point, it pains me, too. :(

On the first chart, it looks like the most recent rate of inflation got down to about -2%, and has since increased to close to 0. This really was the gist of my original question: How does that reconcile with Finster's FDI at negative thirty something? I know they measure somewhat different things, but it seems like night and day.

My second question is in reference to the second chart and the commentary. The chart shows the money supply increasing. Your commentary is that their pumping of money is working. But I keep reading here that it's not just the quantity of money, but also the velocity, that matters, and that the velocity part of the equation has broken down. So my question is, is it really working?

friendly_jacek
10-30-08, 05:55 PM
One of the problems I see on this site that money is defined in a very narrow way. The bigger picture includes credit or debt as money. Sure, money is being printed fast, but the credit is disappearing even faster, thus deflation. As soon as the money printing eclipses credit bursting, inflation. So it is a tug of war. So far, deflation was greater.

BTW, I thought that all itulipers saw the "Money as Dept" movie, but apparently that is not the case:
http://video.google.com/videoplay?docid=-9050474362583451279

c1ue
10-30-08, 06:43 PM
F_J,

Clearly you are disappointed in your recent investment choices, but try to keep an objective view on what you have seen on iTulip.

There is a clear definition of deflation - as opposed to disinflation - listed in the glossary.

I and others have also pointed out the $60-ish/barrel of oil is still equal to/higher the highest price for oil ever prior to 2007...last year.

Certainly there has been a huge drop vs. the peak, but the jury is still out as to whether $1.50 gasoline and $20 oil is on the way.

In fact if you look at some of the evidence bart and others have pointed out - the government's operations with regards to the dollar's strength/weakness have reversed.

By iTulip definition, then, what we're seeing right now cannot be Great Depression type deflation if the government can so quickly and easily get out of it.

It is certainly your choice to continue to try and poke holes in the iTulip thesis - it is a healthy activity - but try to at least put together more credible arguments.

If, for example, you took the position that the US would still be able to get others to support American deficit spending via threatening mayhem - a la the Kim Il Sung/Kim Jong Il school of negotation, that at least is plausible.

sadsack
10-30-08, 06:53 PM
On the first chart, it looks like the most recent rate of inflation got down to about -2%, and has since increased to close to 0. This really was the gist of my original question: How does that reconcile with Finster's FDI at negative thirty something? I know they measure somewhat different things, but it seems like night and day.


I can't find the link to Finster's website at the moment, so I can't quote his explanation, but IIRC the FDI is a comprehensive global measure which includes both domestic and foreign assets priced in dollars, as well as wages. The CPI is strictly confined to domestic consumer prices, and therfore excludes producer prices, foreign dollar denominated assets, wages, etc.

The recent short squeeze on foreign USD has exacerbated the deflation seen in the FDI, while this effect is not even measured by the CPI.

Contemptuous
10-30-08, 07:05 PM
Yes, and the below observation raises the inevitable question - what would global "deflation" look like if the currency that all the liquidating positions were running into was other than the USD. The answer to that is, that the FDI would likely be recording a lot more diluted a "deflation", hence the FDI may be tracking a USD event to a greater or at least equal extent, than it is tracking a purely deflationary event?


I can't find the link to Finster's website at the moment, so I can't quote his explanation, but IIRC the FDI is a comprehensive global measure which includes both domestic and foreign assets priced in dollars, as well as wages. The CPI is strictly confined to domestic consumer prices, and therfore excludes producer prices, foreign dollar denominated assets, wages, etc.

The recent short squeeze on foreign USD has exacerbated the deflation seen in the FDI, while this effect is not even measured by the CPI.

metalman
10-30-08, 09:03 PM
I think I'm going a little batty. I have to remember to stay away from windows today or I may end up jumping out of one.

does make one want to drill a hole in one's head to let the goo out.

sadsack, the reason gold went up is because the government sent it up by raising the price. before 1934 gold was fixed by the gov't at $20, then repriced to $35. gee, why did the price go up during 'deflation'? because the gov't ended the deflation by resetting the price, silly.

itulip says they'll do it again but the modern way... with fiat rather than by fiat.

what don't you get about this simple fact?

bart
10-30-08, 09:44 PM
...
In fact if you look at some of the evidence bart and others have pointed out - the government's operations with regards to the dollar's strength/weakness have reversed.
...


I do urge caution on that, given that there are no guarantees that the ESF hasn't taken a page out of the BoJ's yen intervention book and will reverse again this week or next.

Also do take into account on any of my posts that I'm an active momentum based trader and can inadvertently come across with what might look like an intermediate or longer range picture, when I'm actually only looking at it for short term purposes. My average trade is under two weeks long, and recently under a week.

Contemptuous
10-30-08, 09:57 PM
No Metalman - that was Friendly_Jacek you were supposed to be replying to (two posts above). Friendly_Jacek is the diehard skeptic here referring to gold as rising in both inflation and deflation. Friendly_Jacek is the guy with the nice green riffling dollar bills icon (fresh greenbacks)? Sadsack is the guy with the red box avatar, with teeth on it? Stress of events must be getting to you.

Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.



does make one want to drill a hole in one's head to let the goo out.

sadsack, the reason gold went up is because the government sent it up by raising the price. before 1934 gold was fixed by the gov't at $20, then repriced to $35. gee, why did the price go up during 'deflation'? because the gov't ended the deflation by resetting the price, silly.

itulip says they'll do it again but the modern way... with fiat rather than by fiat.

what don't you get about this simple fact?

metalman
10-30-08, 10:15 PM
No Metalman - that was Friendly_Jacek you were supposed to be replying to (two posts above). Friendly_Jacek is the diehard skeptic here referring to gold as rising in both inflation and deflation. Friendly_Jacek is the guy with the nice green riffling dollar bills icon (fresh greenbacks)? Sadsack is the guy with the red box avatar, with teeth on it? Stress of events must be getting to you.

Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.
Friendly_Jacek.

sorry, sadsack! i meant friendly-jacek.

what's to be skeptical about? a gold standard is a gov't monopoly on gold, pure and simple.

in 1934 fdr said... the dollar is no longer tied to gold for domestic banking.

but is for international transactions, and i hereby proclaim that we will pay you $35 per ounce in trade vs $20. that's 57% inflation. bang... after 3 yrs of deflation.

what's to be skeptical about?

since 2002 the dollar fell 37% against a basket of currencies. same deal, but slower.

very inflationary.

now the dollar is strengthening. guess what the fed is NOT going to do?

wait for 3 yrs of deflation.

anyone who bets the fed will is, how can i put this nicely... stupid.

GRG55
10-31-08, 12:11 AM
It's semantics. Itulip cornered itself by proclaiming earlier that deflation was impossible in USA. Thus deflation is called disinflation on itulip. That's all.

Okay. You say what is happening now is deflation. Then what would you call what happened in the early 1930's?

Or are you one of those that insists that 2008 is a replay of the 1930s?

GRG55
10-31-08, 12:22 AM
I can't find the link to Finster's website at the moment, so I can't quote his explanation, but IIRC the FDI is a comprehensive global measure which includes both domestic and foreign assets priced in dollars, as well as wages. The CPI is strictly confined to domestic consumer prices, and therfore excludes producer prices, foreign dollar denominated assets, wages, etc.

The recent short squeeze on foreign USD has exacerbated the deflation seen in the FDI, while this effect is not even measured by the CPI.

Is this an argument that there is global deflation underway, not just in the US$ zone?

If so, can we hear from any of you iTulipers who live outside the US$ zone and recently watched your currency nosedive off a cliff. How's your purchasing power doing these days. Feel like deflation?

Didn't think so...

phirang
10-31-08, 12:23 AM
Okay. You say what is happening now is deflation. Then what would you call what happened in the early 1930's?

Or are you one of those that insists that 2008 is a replay of the 1930s?

Wow, now THIS is truly inflationary:



Banks asking for credit card debt forgiveness
Thursday October 30, 5:31 pm ET
By Marcy Gordon, AP Business Writer <TABLE height=4 cellSpacing=0 cellPadding=0 border=0><TBODY><TR><TD height=4></TD></TR></TBODY></TABLE>Banks losing billions in unpaid credit card bills urge government to forgive consumer debt

WASHINGTON (AP) -- With defaults on credit card debt spiraling amid a global financial downturn, banks already reeling from the mortgage crisis are losing billions more from unpaid credit card bills. Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.

...


http://biz.yahoo.com/ap/081030/meltdown_credit_cards.html

Rajiv
10-31-08, 12:39 AM
Yes the deflation is primarily in the US$ Zone, and perhaps the yen zone

Let us see California

Then

http://www.allamericanpatriots.com/files/images/california-gas-prices.jpg

Now

From http://www.californiagasprices.com/

<table class="PriceTable" style="border-bottom: 0px none;" cellspacing="0" width="98%"><tbody><tr><td class="selected">Regular Gas (http://www.californiagasprices.com/index.aspx?fuel=A)</td> <td class="menu">Midgrade (http://www.californiagasprices.com/index.aspx?fuel=B)</td> <td class="menu">Premium (http://www.californiagasprices.com/index.aspx?fuel=C)</td> <td class="menu">Diesel Fuel (http://www.californiagasprices.com/index.aspx?fuel=D)</td> </tr> <tr class="Sidebarheader"> <th colspan="4">Lowest Regular Gas Prices in the Last 48 Hours</th> </tr> </tbody></table> <table class="PriceTable" cellspacing="0" width="98%"><tbody><tr class="DetailTableHeader"> <th width="35"> Price</th> <th colspan="2" width="150"> Station</th> <th width="75"> Area</th> <th width="75"> Time</th> <th width="75"> Thanks</th> </tr> <tr class="PTableRow"> <td class="PColLow" rowspan="2">http://www.californiagasprices.com/images/p/g/D35E393.gif (http://www.californiagasprices.com/update_form.aspx?pid=89298015)</td> <td class="PStation" align="left"> Costco (http://www.californiagasprices.com/Costco_Gas_Stations/index.aspx) </td> <td class="PFind" rowspan="2" valign="top"> http://www.californiagasprices.com/images/art/more_info2.gif (http://www.californiagasprices.com/redirect.aspx?type=i&pid=89298015)
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http://www.californiagasprices.com/images/art/orangecar.gif (http://www.californiagasprices.com/member_info.aspx)</td> </tr> <tr class="PTableRow"> <td class="PAddress" colspan="1">629 W Grangeville Blvd & N 11th Ave </td> </tr> <tr class="PTableRow"> <td class="PColLow" rowspan="2">http://www.californiagasprices.com/images/p/g/5E93836.gif (http://www.californiagasprices.com/update_form.aspx?pid=89308030)</td> <td class="PStation" align="left"> Shell (http://www.californiagasprices.com/Shell_Gas_Stations/index.aspx) </td> <td class="PFind" rowspan="2" valign="top"> http://www.californiagasprices.com/images/art/more_info2.gif (http://www.californiagasprices.com/redirect.aspx?type=i&pid=89308030)
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7:15 PM</td> <td class="PList" rowspan="2">LesFillin (http://www.californiagasprices.com/Profile.aspx?member=LesFillin)
http://www.californiagasprices.com/images/art/orangecar.gif (http://www.californiagasprices.com/member_info.aspx)</td> </tr> <tr class="PTableRow"> <td class="PAddress" colspan="1">620 W 7th St & N 11th Ave </td> </tr> <tr class="PTableRow"> <td class="PColLow" rowspan="2">http://www.californiagasprices.com/images/p/g/5E93836.gif (http://www.californiagasprices.com/update_form.aspx?pid=89308034)</td> <td class="PStation" align="left"> Bangar's Food Gas & Liquor (http://www.californiagasprices.com/Bangar%27s_Food_Gas_%26_Liquor_Gas_Stations/index.aspx) </td> <td class="PFind" rowspan="2" valign="top"> http://www.californiagasprices.com/images/art/more_info2.gif (http://www.californiagasprices.com/redirect.aspx?type=i&pid=89308034)
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http://www.californiagasprices.com/images/art/orangecar.gif (http://www.californiagasprices.com/member_info.aspx)</td> </tr> <tr class="PTableRow"> <td class="PAddress" colspan="1">711 E Lacey Blvd & 10th </td> </tr> <tr class="PTableRow"> <td class="PColLow" rowspan="2">http://www.californiagasprices.com/images/p/g/EC1465C.gif (http://www.californiagasprices.com/update_form.aspx?pid=89306044)</td> <td class="PStation" align="left"> Costco (http://www.californiagasprices.com/Costco_Gas_Stations/index.aspx) </td> <td class="PFind" rowspan="2" valign="top"> http://www.californiagasprices.com/images/art/more_info2.gif (http://www.californiagasprices.com/redirect.aspx?type=i&pid=89306044)
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http://www.californiagasprices.com/images/art/purplecarspeed.gif (http://www.californiagasprices.com/member_info.aspx)</td> </tr> <tr class="PTableRow"> <td class="PAddress" colspan="1">2100 Dr Martin Luther King Jr Parkway near E 23rd </td> </tr> <tr class="PTableRow"> <td class="PColLow" rowspan="2">http://www.californiagasprices.com/images/p/g/51E189F.gif (http://www.californiagasprices.com/update_form.aspx?pid=89300100)</td> <td class="PStation" align="left"> Mobil (http://www.californiagasprices.com/Mobil_Gas_Stations/index.aspx) </td> <td class="PFind" rowspan="2" valign="top"> http://www.californiagasprices.com/images/art/more_info2.gif (http://www.californiagasprices.com/redirect.aspx?type=i&pid=89300100)
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7:13 PM</td> <td class="PList" rowspan="2">tally3 (http://www.californiagasprices.com/Profile.aspx?member=tally3)
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Also

<table class="SidebarSection" width="100%"><tbody><tr class="SidebarHeader"><th colspan="5"> Unleaded Gasoline Average Prices</th> </tr> <tr> <th colspan="2" align="right"> California</th> <th> USA </th> <th> Trend</th> </tr> <tr> <td width="100"> http://www.californiagasprices.com/images/blank.gifToday
http://www.californiagasprices.com/images/blank.gifYesterday
http://www.californiagasprices.com/images/blank.gifOne Week Ago
http://www.californiagasprices.com/images/blank.gifOne Month Ago
http://www.californiagasprices.com/images/blank.gifOne Year Ago</td> <td align="left"> 2.898
2.956
3.192
3.629
2.909</td> <td align="right"> 2.505
2.545
2.768
3.586
2.761</td> <td align="center" valign="middle"> http://www.californiagasprices.com/images/art/trend_down.gif</td></tr></tbody></table>

jcole
10-31-08, 01:50 AM
Greetings, I am new to itulip and quite new to all of this--just wanted to say hello & observe for some time, actually joined due drop in investment portfolio & interest in gold investments--reading Americas Bubble Economy--a bit late on the scene, I believe.
Jane

Contemptuous
10-31-08, 03:01 AM
Thank you for this clarification Rajiv. Asset values are imploding worldwide, and yet, the most notable "deflationary" effects seem as yet confined inside the USD zone (possibly yen zone. too). BTW - Bill posted a fantastic address by Japanese American economist Richard Koo (Fed economist) in the select forums wherein he draws some detailed parallels between the US and Japan's 15 year disinflation with some very counter-intuitive conclusions.


Yes the deflation is primarily in the US$ Zone, and perhaps the yen zone

santafe2
10-31-08, 03:25 AM
The Internets, they are filled with nonsense.

Fred, after a very long day attached to a long week of attempting to convince new customers to accept 'the solar', and then reading the sometimes too serious comments on this thread, this comment made me laugh out loud. Thanks.

Contemptuous
10-31-08, 04:13 AM
Here's another promising harbinger for US deflation going forwards (not).

765

xela
10-31-08, 07:36 AM
sorry, sadsack! i meant friendly-jacek.

what's to be skeptical about? a gold standard is a gov't monopoly on gold, pure and simple.

in 1934 fdr said... the dollar is no longer tied to gold for domestic banking.

but is for international transactions, and i hereby proclaim that we will pay you $35 per ounce in trade vs $20. that's 57% inflation. bang... after 3 yrs of deflation.

what's to be skeptical about?

since 2002 the dollar fell 37% against a basket of currencies. same deal, but slower.

very inflationary.

now the dollar is strengthening. guess what the fed is NOT going to do?

wait for 3 yrs of deflation.

anyone who bets the fed will is, how can i put this nicely... stupid.
What's your take, they wait for the election or until january with the new admin in place?

c1ue
10-31-08, 08:45 AM
I do urge caution on that, given that there are no guarantees that the ESF hasn't taken a page out of the BoJ's yen intervention book and will reverse again this week or next.

Also do take into account on any of my posts that I'm an active momentum based trader and can inadvertently come across with what might look like an intermediate or longer range picture, when I'm actually only looking at it for short term purposes. My average trade is under two weeks long, and recently under a week.<!-- / message --><!-- sig -->

Bart,

Understood.

I am almost your complete opposite: I operate under the grand-dads limping using a cane once a generation to trade model. Unfortunately the generations are happening much more quickly these days - 5 or 10 years instead of 30 :rolleyes:

So rather than change my game - I've switched over to starting/buying/operating businesses.

friendly_jacek
10-31-08, 03:13 PM
Okay. You say what is happening now is deflation.

Yes, look up the definition of deflation (http://en.wikipedia.org/wiki/Deflation), if you don't believe.


Then what would you call what happened in the early 1930's?


That is officially called a deflationary spiral (http://en.wikipedia.org/wiki/Deflationary_spiral), but you can call it hyperdeflation if you wish.

The history rhymes but doesn't exactly repeats. No 1929, but bouts of deflation-inflation.
Alternatively, it can be considered as deflation/inflation happening at the same time (but at various speeds) as deflation of assets and devaluation of $ value.

friendly_jacek
10-31-08, 03:44 PM
Clearly you are disappointed in your recent investment choices, but try to keep an objective view on what you have seen on iTulip.



Since you asked, I will answer. I think itulip is one of the best investment sites I ever discovered. However, as my understanding of economy increases (and I was totally ignorant 1 year ago), the more problems I see with itulip approach.

Now, Itulip got a lot of call right, and some with amazing timing accuracy (the best recent example is the september crash worning). However, some of the explanations and arguments are very weak if not outright incorrect. There is also a lot of big Ego clinging to previous calls and twisting reality to confirm to expectations.

This makes me uneasy as it questions credibility and the validity of the whole Ka-Poom theory. I still believe the Ka-Poom will happen in one way or another, but we should discuss different aspects of it or timing and not just divide into inflation only camp or deflation only camp as the truth is likely somewhere in between.

Thinks Itulip could improve:
1. deflation vs disinflation: itulip should start using these economic terms in the mainstream, common sense.
2. credit destruction: itulip should recognise debt as money and credit destruction or deleveraging as deflationary forces.
3. reavaluating money inflow/outflow analysis and $ exchange rate analysis in context of previous recessions.
4. downsizing in the Ego department
5. Fred consulting with EJ before firing quick replies.

PS: Luke, be patient with the metal person, as his scull is hard due to all that metal.

bart
10-31-08, 04:00 PM
Bart,

Understood.

I am almost your complete opposite: I operate under the grand-dads limping using a cane once a generation to trade model. Unfortunately the generations are happening much more quickly these days - 5 or 10 years instead of 30 :rolleyes:

So rather than change my game - I've switched over to starting/buying/operating businesses.

More power to you on your own approach. The only folk that I've seen being quite successful in investing in my life are the ones that truly define their own approach, and then let others have their own opinions too.
"Think for yourselves and let others enjoy the privilege to do so, too."
-- Voltaire

I'm over 60 and there are other factors, so starting businesses etc. isn't workable for me. Also my experiences with owning & running my own photofinishing business in the '70s and '80s left me cool at best in dealing with all the "interference".

ThePythonicCow
10-31-08, 04:04 PM
they wait for the election or until january with the new admin in place?I was under the (probably naive) impression that it was neither November nor January, but October that the Fed opened up the money spigots. Witness the reversing back to near sanity of LIBOR, the recent lowerings of the Fed Funds rates, the generous dollar swaps with other Central Banks, the willingness to finance commercial debt paper, and lordie knows what else in the way of "free" money.

Prior to October, they seemed to want to carefully funnel (sterilize) their free money to the Chosen Few bank cartel masters, keeping it out of the hands of us common folk.

However I figure it must take a few months for the newly printed money to work its way through the financial plumbing to where it has a broad affect on dollar denominated prices.

WDCRob
10-31-08, 04:08 PM
For those arguing that Fred/EJ's site-specific definition of deflation is self-serving or inconsistent, ask yourself...

Do you think Mish et al are describing an event lasting a week, a month, a quarter or a year when they talk of 'deflation?' Clearly they are not.

And EJ's thesis has always been presented in juxtaposition with the 'deflationistas.' He's used their arguments as a foil for KaPoom, and engaged them directly in debate here several times. I believe those debates have always used deflation in the context of a self-reinforcing process. It's been an unstated assumption.

So while it may be semantically confusing to you (especially if you arrived only recently), it seems to me that it's also intellectually honest and that it's time to just move on already.

iTulip could have been clearer in their choice of words, but the meaning has been consistent across time.

Charles Mackay
10-31-08, 05:01 PM
Exactly right!

Keen and Janszen concluded in their last iTulip discussion that letting wage inflation rip is the only viable medium term political solution to the debt deflation problem. Will the next administration be the one to do the evil dead? It's been shaping up for years.

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

I can't see how this would be possible. GM wage rates are already at $60/hour including benefits. If you tried to increase these wages to $70 next year and $81 the next year etc.... all the money in dollars would rush for inflation hedges creating an inflationary spiral and skyrocketing interest rates and thereby defeating the whole purpose of the wage increase. I think an overnight dollar devaluation and debt jubilee is more likely because overnight every person holding dollars is instantly devalued and can't rush out for protection.

And that is the reason why this transition period isn't tradeable. It appears that you better be positioned for this to happen on any given weekend.

Charles Mackay
10-31-08, 05:14 PM
For those arguing that Fred/EJ's site-specific definition of deflation is self-serving or inconsistent, ask yourself...

Do you think Mish et al are describing an event lasting a week, a month, a quarter or a year when they talk of 'deflation?' Clearly they are not.

And EJ's thesis has always been presented in juxtaposition with the 'deflationistas.' He's used their arguments as a foil for KaPoom, and engaged them directly in debate here several times. I believe those debates have always used deflation in the context of a self-reinforcing process. It's been an unstated assumption.

So while it may be semantically confusing to you (especially if you arrived only recently), it seems to me that it's also intellectually honest and that it's time to just move on already.

iTulip could have been clearer in their choice of words, but the meaning has been consistent across time.

It appears that the choice of the phrase Ka Poom is a little confusing and doesn't really represent EJ's theory very well since it's a 4 step process. I think when he annotated this graph (the 4 A's being the 30's, and the 4 B's being the current times) was the first time I understood why he wan't labeling 2000- 2002 a Ka and the (2002-2008 energy and commodity bubble) a poom. It finally became clear to me what he was trying to say!

Note the difference between A4 and B4 which represents being on the gold standard and not being on the gold standard.

EJ and Fred please advise if I'm misstating anything here.

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

c1ue
10-31-08, 09:01 PM
1. deflation vs disinflation: itulip should start using these economic terms in the mainstream, common sense.
2. credit destruction: itulip should recognise debt as money and credit destruction or deleveraging as deflationary forces.
3. reavaluating money inflow/outflow analysis and $ exchange rate analysis in context of previous recessions.
4. downsizing in the Ego department
5. Fred consulting with EJ before firing quick replies.

F_J,

1) iTulip has a clear definition for deflation and disinflation - it is in the glossary. How can iTulip in good conscience start using these terms as the "mainstream, common sense" commentators do? You'll note those like Mish don't even define deflation except as a catch all of somethings price going down. Mish doesn't distinguish between asset deflation, commodity deflation, price deflation, etc etc. For him, going down means deflation. Even if it is for 1 millisecond, or for 1 decade. Other mainstream commentators are mostly equally vague. Vagueness is good - it means you can reinterpret later if something doesn't work out.

2) iTulip has talked at length about asset price deflation. Perhaps you should clarify what you believe is missing. Is that the recent dollar strengthening was not specifically predicted? And how is the iTulip thesis incorrect with regards to debt/money/credit etc?

3) I'm not sure where you're going with this. EJ/iTulip has clearly graphed FDI flows as an indicator of possible future behavior. FDI flows have been talked about for at least the time I've been around.

4) We are all swelled heads. We're putting all this out on the Internet!

5) Fred(s) and EJ - You can join up with Jim Nickerson and restart that horse beating. From my point of view - there are clear stylistic differences between the various Freds and EJ. For example, one of the Freds is clearly a hard core economist, while another is equally the one (or ones) doing the hard core maintenance of iTulip. But Fred ain't EJ.

metalman
10-31-08, 09:55 PM
Since you asked, I will answer. I think itulip is one of the best investment sites I ever discovered. However, as my understanding of economy increases (and I was totally ignorant 1 year ago), the more problems I see with itulip approach.

Now, Itulip got a lot of call right, and some with amazing timing accuracy (the best recent example is the september crash worning). However, some of the explanations and arguments are very weak if not outright incorrect. There is also a lot of big Ego clinging to previous calls and twisting reality to confirm to expectations.

This makes me uneasy as it questions credibility and the validity of the whole Ka-Poom theory. I still believe the Ka-Poom will happen in one way or another, but we should discuss different aspects of it or timing and not just divide into inflation only camp or deflation only camp as the truth is likely somewhere in between.

itulip has a serious pearls before swine problem. there are so many sites full of ******* idiots pretending to know anything. the real solution is for itulip to go subscription only and charge $1000 a year. then it won't have to spend time explaining how to tell one of these...

http://dclips.fundraw.com/zobo500dir/www_Sticker_Tk_kiss_my_ass.jpg

from one of these...

http://tasteslikemyelbow.com/images/20080413163335_elbow.gif

the public spiritness is starting to bug me.


Thinks Itulip could improve:
1. deflation vs disinflation: itulip should start using these economic terms in the mainstream, common sense.deflation to 99.99% of the population means...

http://mschaut.files.wordpress.com/2008/02/1936__great_depression.jpg

...vs this...

http://www.matternetwork.com/images/Matter/hybrid.jpg

(that's a car developed by those poor, suffering japanese during their terrible bout of 'deflation' when they took down general motors)

itulip has to continuously explain that there is deflation and there is deflation. but when you are talking to people who do not know this...

http://dclips.fundraw.com/zobo500dir/www_Sticker_Tk_kiss_my_ass.jpg

..from this...

http://tasteslikemyelbow.com/images/20080413163335_elbow.gif

what's the point? what that audience really wants to hear is that no matter what their...

http://www.usagold.com/images/gold-coins-images.jpeg

... will go up. so all manner of stupid crap is invented to satisfy that desire, such as saying that 'deflation' will make gold go up.

if i were running itulip i'd simply tell these people to fuck off. but i guess ej is more patient than i am.


2. credit destruction: itulip should recognise debt as money and credit destruction or deleveraging as deflationary forces.ka-poom says disinflation is inevitable after debt deflation... ah, fuckit. google 'ka-ppom theory'


3. reavaluating money inflow/outflow analysis and $ exchange rate analysis in context of previous recessions.the idea that the usa enjoyed a group capital flow bonanza from poor countries is classic itulip... if you don't get it, that's your loss.


4. downsizing in the Ego departmentthis one i agree with. it's not ego, tho, but the opposite. insecurity. it's unbecoming.


5. Fred consulting with EJ before firing quick replies.you should talk to your mother before posting here. better yet, my mother.


PS: Luke, be patient with the metal person, as his scull is hard due to all that metal.whatever.

Contemptuous
10-31-08, 10:09 PM
Wow that is an impressive smackdown there Metalman. Moses on the mount of olives sort of material. Lissen ta him, layin' down the law. Cecil B. DeMille style declamatory. Fortunately with a "my way or the highway" approach such as yours we have others running iTulip else there'd be a very large number of think-alikes around here. Place full of Metalman clones?

"Blow me"? That is guaranteed to win over skeptical minds right there.


there are so many sites full of ******* idiots pretending to know anything. ... if i were running itulip i'd simply tell these people to fuck off. ... the idea that ... etc. ... is classic itulip... if you don't get it, that's your loss. ... you should talk to your mother before posting here. better yet, my mother. ... blow me.

metalman
10-31-08, 10:17 PM
Wow that is an impressive smackdown there Metalman. Moses on the mount of olives sort of material. Lissen ta him, layin' down the law. Cecil B. DeMille style declamatory. Fortunately with a "my way or the highway" approach such as yours we have others running iTulip else there'd be a very large number of think-alikes around here. Place full of Metalman clones?

"Blow me"? That is guaranteed to win over skeptical minds right there.

my bad. will delete.

GRG55
11-01-08, 12:56 AM
Yes, look up the definition of deflation (http://en.wikipedia.org/wiki/Deflation), if you don't believe.



That is officially called a deflationary spiral (http://en.wikipedia.org/wiki/Deflationary_spiral), but you can call it hyperdeflation if you wish.

The history rhymes but doesn't exactly repeats. No 1929, but bouts of deflation-inflation.
Alternatively, it can be considered as deflation/inflation happening at the same time (but at various speeds) as deflation of assets and devaluation of $ value.

You can keep me on record as "I don't believe" :p

Compared to the 1930's this doesn't even qualify as a "rhyme".

Down Under
11-01-08, 03:14 AM
itulip has a serious pearls before swine problem. there are so many sites full of ******* idiots pretending to know anything. the real solution is for itulip to go subscription only and charge $1000 a year. then it won't have to spend time explaining how to tell one of these...



Spot on...

Down Under
11-01-08, 03:18 AM
Yes, look up the definition of deflation (http://en.wikipedia.org/wiki/Deflation), if you don't believe.



F_J, a broken record get a little monotonous after a while, don't you think?

xela
11-01-08, 06:02 AM
I was under the (probably naive) impression that it was neither November nor January, but October that the Fed opened up the money spigots. Witness the reversing back to near sanity of LIBOR, the recent lowerings of the Fed Funds rates, the generous dollar swaps with other Central Banks, the willingness to finance commercial debt paper, and lordie knows what else in the way of "free" money.

Prior to October, they seemed to want to carefully funnel (sterilize) their free money to the Chosen Few bank cartel masters, keeping it out of the hands of us common folk.

However I figure it must take a few months for the newly printed money to work its way through the financial plumbing to where it has a broad affect on dollar denominated prices.

Sure, but all the new credit may not trickle down because too much debt was and is the problem to begin with..
So how to reinflate? This is the real question right now. What if even 0% and principial reductions wouldn't overall stop the deflation (used in the sense that you can call this period disinflation after the fact, but for the time being its deflation), simply because so much bad debt is around and unemployment would still rise?
Another round of tax-rebates in the form of cheques to the people, in time for Christmas or that sucker may go down, that is my fear.

labasta
11-04-08, 09:09 AM
We have made the point for the past few years that when US recession came, the next impact on China's exports will be much less significant than is commonly assumed. China trades far more within Asia than it does with the US and Europe combined. In 2006 US exports to the US was 31% of total, now it is even less, closer to 25%. If we cut our imports from China by 20%, that will only cause China's total exports to fall by only 5%. They may be able to make up the difference via increased exports within Asia and by boosting domestic consumption.


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



Thanks Fred,

I wonder if anyone is relatively immune though due to the interconnectivety of all markets.

I see China exports about the same to Europe and then double that to the rest of Asia. Who do these blocks sell to? How are their economies doing? Surely if one economic block is reduced, they all get reduced.

This is globalisation after all, isn't it? How does the lack of orders for Volvo trucks (50,000 to 155 in the third quarter from 2007 to 2008) affect the Swedish economy? How does it effect commodity prices and the commodity based countries? The knock on effects must be felt around the globe like dropping a stone in a pond and watching the diluted ripples disperse out.

That stone is the Disneyland money of the United States of America. And it seems that stone could be a boulder. We are all waiting to see how big the stone is relative to the pond.

It could destroy the world.

ThePythonicCow
11-04-08, 10:17 AM
It could destroy the world.

Well ... I suspect that planet Earth, and even most life thereon, will survive ;).

I suspect that you're right in doubting that the recent Chinese boom will continue uninterrupted. Though the long term trend for China may remain upward, it can't avoid this world wide correction.

Whenever something collapses dramatically, it tends to collapse to whatever was the "solid ground" below it. The question, sometimes difficult to know ahead of time, is what's solid.

In any event, I'm convinced that world wide communications and computers are here to stay, which lays in place a fabric of connectivity and information processing that will continue to be enjoyed by the majority of humans, so long as anything resembling our human civilization survives.

Those who are financially and physically healthy, and willing to adapt their living style to what they can afford, will do fine, I trust.

Regretably there are far too many who could be in serious trouble, which could make life even more challenging for all of us.

Martin D. Weiss has a rather pessimistic view of what lies ahead in this great housing collapse, over at http://www.marketoracle.co.uk/Article7126.html . He anticipates that the current bubble collapse will be followed by a serious recession, to be followed in turn by a serious depression, with housing prices in some areas cut in half, then in half again, then in half again. I can readily believe that housing price forecast, having recently priced a modest 3 bed 2 bath house here in North Texas for $115K that was a little nicer, newer and bigger than one I sold last year in California, for something of a loss off its peak appraisal of $800K. If such a house, anywhere in the United States, cost about $100K in current 2008 dollars, that would be square reasonably with the cost to build them, in my view. Such pricing will absolutely devestate the neighborhood of Silicon Valley (Northern California) in which I lived for twenty years. The seaside resort of Monterey, south of Silicon Valley, has already seen its home prices fall over 60% in the last year.

Such economic collapse risks leading to significant social unrest, rendering some areas unsafe to live in.

algerwetmore
11-04-08, 10:36 AM
Can there be that much housing deflation when the government printing presses are operating 24/7? People will spend some of their money on something tangible.

jk
11-04-08, 01:49 PM
I can readily believe that housing price forecast, having recently priced a modest 3 bed 2 bath house here in North Texas for $115K that was a little nicer, newer and bigger than one I sold last year in California, for something of a loss off its peak appraisal of $800K. If such a house, anywhere in the United States, cost about $100K in current 2008 dollars, that would be square reasonably with the cost to build them, in my view. Such pricing will absolutely devestate the neighborhood of Silicon Valley (Northern California) in which I lived for twenty years. The seaside resort of Monterey, south of Silicon Valley, has already seen its home prices fall over 60% in the last year.
houses will always be cheaper in north texas, where cities have room to sprawl in all directions, than in silicon valley- with its difficult commutes and special employment opportunities.

Charles Mackay
11-04-08, 02:12 PM
This from JSMineset today

Jim,

Last Thursday afternoon I dropped into the local Suzuki automobile dealer in order to have a look at the new SX4 AWD mini crossover. The sales manager and I got chatting about the economy and as it turns out, he was quite knowledgeable on the subjects that we all read regularly on JSMineset.com. This gent was involved in real estate investing on the side; specifically going to bank auctions, the ones where the bank is doing an absolute auction of properties they have already taken under a prior foreclosure.


He told me that one should not listen to any of the ‘reports’ of housing price declines, because they do not honestly reflect what is going on out there for the educated buyers. He told me that he was at an auction last week of several fairly new 3 bedroom homes on 4 acres across the street from a local lake here in New Hampshire with water rights and they were selling for $35K each at auction. I asked him how much these houses had originally sold for and he said $300K a few years ago!! I asked how many he picked up… he said none! I asked why at 11 cents on the dollar did he not buy anything? He told me that he is watching the stress in the markets closely and he feels they still have much further to go on the downside. His high bid was $25K and that’s all he is willing to pay.


He then told me of a very nicely renovated old farmhouse with attached large barn on an in town city lot of about ½ acre up near the lakes region in NH that was quite valuable that sold for $65K at bank auction a week or so ago. He said the inventories are full of this stuff and it’s going to get much worse. WOW! And none of this is being broadcast anywhere! He explained that he is on a series of auction listing sites which supply him the [real] data and offerings. It’s getting very ugly out there if this is all true information.


CIGA Bruce

c1ue
11-04-08, 03:21 PM
houses will always be cheaper in north texas, where cities have room to sprawl in all directions, than in silicon valley- with its difficult commutes and special employment opportunities.

Not so clear how well the special employment opportunities will hold up.

The picks and shovels sellers to the entire semiconductor industry - the equipment manufacturers - are having an average of 15% layoffs.

Software and services are going to be 20%+.

Internet also seeing layoffs.

And this is only the first round.

I suspect history will show that the semi + internet boom was also highly dependent on cheap (or free) money.

ThePythonicCow
11-04-08, 04:08 PM
Software and services are going to be 20%+..
However software is becoming increasingly susceptible to global wage pressures.

One of the reasons I got out of the computer programming business (besides just wanting to try something different) after 30 good years was I noticed people in far away places doing just as good work (maybe better) as myself, for one-fifth the pay. I figured that could not last.

The computer company I used to work for is moving more and more of its engineering out of Silicon Valley, to other locations that cost less.

labasta
11-04-08, 06:48 PM
Martin D. Weiss has a rather pessimistic view of what lies ahead in this great housing collapse, over at http://www.marketoracle.co.uk/Article7126.html . He anticipates that the current bubble collapse will be followed by a serious recession, to be followed in turn by a serious depression, with housing prices in some areas cut in half, then in half again, then in half again. I can readily believe that housing price forecast, having recently priced a modest 3 bed 2 bath house here in North Texas for $115K that was a little nicer, newer and bigger than one I sold last year in California, for something of a loss off its peak appraisal of $800K. If such a house, anywhere in the United States, cost about $100K in current 2008 dollars, that would be square reasonably with the cost to build them, in my view. Such pricing will absolutely devestate the neighborhood of Silicon Valley (Northern California) in which I lived for twenty years. The seaside resort of Monterey, south of Silicon Valley, has already seen its home prices fall over 60% in the last year.

Such economic collapse risks leading to significant social unrest, rendering some areas unsafe to live in.



Shit!


I want to correct a previous number. It's 42k of orders for volvo trucks in the third quarter of 2007 compared to 155 in the third quarter of 2008.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7AhRhE4NJlM (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7AhRhE4NJlM)

It also affects suppliers of electronics and machine parts for the cars which will affect the machine manufacturers of the machines which make those parts etc. etc. Diluted ripples.

But 42k to 155!!! I mean, that's not a recession! That's a stop.

800k house to 115k!!! How much funny money is this? Where is this "solid" wall? Crap!

ThePythonicCow
11-04-08, 07:42 PM
But 42k to 155!!! I mean, that's not a recession! That's a stop.

Yeah - that was a painful drop if ever I saw one.

What's worse, this wasn't a drop in Corvette's or yachts or Rolex watches. This was a drop in one of the more commonly used short haul delivery trucks, from what I can tell. That means a bunch of small and medium businesses are tightening their belts. But I guess we knew that.


Where is this "solid" wall?

Look down toward your feet. That solid wall is down that away, somewhere below your feet.

c1ue
11-05-08, 04:07 PM
The computer company I used to work for is moving more and more of its engineering out of Silicon Valley, to other locations that cost less.

Yes, but since software is inherently extremely profitable - assuming any reasonable customer base - this outsourcing is simple and pure greed.

Its not like you need tens of thousand of workers to assemble a car, or that there are significant commodity inputs into software production.

It is pure greed.

ThePythonicCow
11-05-08, 04:29 PM
Yes, but since software is inherently extremely profitable - assuming any reasonable customer base - this outsourcing is simple and pure greed.

That assumption is not always so. Some software markets are small. Only a very few software companies show the large earnings and profit margins that are the indicators of greed, successfully realized.

lurker
11-05-08, 06:44 PM
That assumption is not always so. Some software markets are small. Only a very few software companies show the large earnings and profit margins that are the indicators of greed, successfully realized.

Agreed. The relatively low cost of entry (low capital cost) means that greedy software companies will have their lunch stolen by a leaner startup.

Taken to an extreme I've noticed that a lot of the best software you get is free. Filezilla FTP server, Mozilla, GNU. I run a windows machine with almost no MS applications now because the freeware is better.

ThePythonicCow
11-05-08, 07:00 PM
... a lot of the best software you get is free. Filezilla FTP server, Mozilla, GNU.

That's Open Source software. I made some good money the last few years writing open source software, mostly within the Linux kernel.

Open Source software has a business model and money flows. It's just that the end user can easily obtain and use it, entirely legally and conveniently, for zero software license cost.

Spartacus
11-06-08, 02:29 AM
you have not defined your terms, so we don't know what you're talking about.

Deflation what is it?
declining prices?
reduced money supply ? (and if so, which aggregate?)


the iTulip position is that the government will do anything and everything to prevent runaway deflation - and "deflation" here means the wholesale collape of hundreds of banks and the attendant collapse of most of the credit markets.

as I understand the iTulip thesisoverall prices may go up (or down)
whole sections of the credit markets may collapse (or not)
prices among whole segments of the economy may drop (or rise - like say prices of certain types of housing may rise as others fall)

events that may tend to deflation (in many cases you can argue about individual events being inflationary or deflationary) will happen (have happened, are happeing and will connue to happen) but the government and FED are doing all they can to prevent a cascade.


A quick and simple question for smart itulipers.
If printing $ is so easy as often hinted on itulip, why this deflation (I'm sorry, disinflation) was allowed to happen just before the elections, cratering all possible assets and creating a huge misery for US citizens?

If helicopter Ben had it all figured out and planned, why this financial fiasco reached these proportions?

Another related question. If some of the recent action on the stock markets was caused by margin calls and forced liquidations and redemption that became worse as the nominal priced went lower and lower, why this is not a deflationary spiral?

If the WMD derivatives started to implode, doesn't it create a chain reaction with more deflationary implosions?

Finally, if the future earnings go down in 2008/2009 due to credit squeeze/bursting or higher dollar or record low sentiment ratings and generate more stock selling and more margin calls, why it would not be a spiral action?

In simple words please!

I've heard so much about "printing dollars" story that I don't believe it's true anymore. Most money in modern societies is credit (isn't it 90%?). Didn't EJ declare start of credit destruction in 2007 (one of the best calls in itulip IMHO)?

*T*
11-06-08, 06:30 AM
As a user I am very keen on open source software -- but never understood the business model.
ThePythonicCow, could you explain the business model briefly please? How and where does the money flow?

c1ue
11-06-08, 11:13 AM
Only a very few software companies show the large earnings and profit margins that are the indicators of greed, successfully realized.

TPC,

The reason only a very few software companies show large earnings and profit margins is more due to greed of management than anything else.

Let me put it this way: How many programmers does it take to create a typical piece of complex software? 100? 1000?

Let's say it is 100 - because programmers = cats, and 1000 cats cannot be harnessed to pull a wagon.

100 * 100K (average salary) * 2 (Burden = management and other overhead) = $20M

At $100 a copy - we're talking about 400K users (assume retail channel has 100% margin).

That's not a lot given there are roughly 1B computers in the world.

0.04% market share?

Of course there are plenty of specialty software developers. My previous industry, the average development team was around 40, but the software sold for $200K ASP/$450K list.

Average salaries - I'll assume 200K (high), thus net cost was $16M. But the 1000 time based licenses sold each year = $67M. Yet the profitability for the company was only around 12%.

Where did the extra money go? Executive compensation. A CEO with a starting $60M package who lasted 4 years, plus 100K share grants for his 'team' each of those 4 years.

Let me put it another way: Show me an industry where you can build a business by giving away free software like Adobe does.

#1 is the advertising business.

#2 is the entertainment 'business', actually an IP protection racket.

Seeing a pattern yet?

EJ
11-06-08, 11:52 AM
TPC,

The reason only a very few software companies show large earnings and profit margins is more due to greed of management than anything else.

Let me put it this way: How many programmers does it take to create a typical piece of complex software? 100? 1000?

Let's say it is 100 - because programmers = cats, and 1000 cats cannot be harnessed to pull a wagon.

100 * 100K (average salary) * 2 (Burden = management and other overhead) = $20M

At $100 a copy - we're talking about 400K users (assume retail channel has 100% margin).

That's not a lot given there are roughly 1B computers in the world.

0.04% market share?

Of course there are plenty of specialty software developers. My previous industry, the average development team was around 40, but the software sold for $200K ASP/$450K list.

Average salaries - I'll assume 200K (high), thus net cost was $16M. But the 1000 time based licenses sold each year = $67M. Yet the profitability for the company was only around 12%.

Where did the extra money go? Executive compensation. A CEO with a starting $60M package who lasted 4 years, plus 100K share grants for his 'team' each of those 4 years.

Let me put it another way: Show me an industry where you can build a business by giving away free software like Adobe does.

#1 is the advertising business.

#2 is the entertainment 'business', actually an IP protection racket.

Seeing a pattern yet?

Quick note on another business model. One tech company I ran used open source where no wheels needed to be re-invented or where standards could be better met with off-the-shelf free code. The product was open source glued together with custom code "wrapped in metal," that is, running on different sized Made in Taiwan Linux boxes and delivered to customers via a reseller channel as a plug-and-play "appliance." Excellent margins and the open source/Linux architecture allowed us to turn product requirements very fast and produce major releases two or three times as fast as competitors who wrote all of their own code and delivered product as code that had to be installed on a server by the customer, which introduced OS dependency and all kinds of other variability that led to reliability and other problems for the customer and expense for the vendors.

On a separate note, an underreported event occurred in distribution pricing law in the US last year.

Since 1912 in the US it has been illegal for vendors to dictate prices to distributors. All they can do is provide an MSRP. This rule is the bane of channel-based sales businesses because one reseller will make a huge effort to sell a product to an end user against a competing vendor's product only to lose the sale to a volume "box house" that offered the product at a lower price because they purchased at a volume discount from the vendor. However, the rule did result in lower overall prices for the end user. Now vendors can and many do provide both an MSRP and a "floor" price. The aggregate price impact across the economy might be substantial if this becomes common practice–once the depression ends, that is.

I've met Chambers a couple of times. Very smart, solid guy. Don't envy him in his current predicament.

Cisco Shares Drop; Chambers Forecasts Sales Decline (http://www.bloomberg.com/apps/news?pid=20601103&sid=aiavo11qRD.Y&refer=us)

Nov. 6 (Bloomberg) -- Cisco Systems Inc. (http://www.bloomberg.com/apps/quote?ticker=CSCO%3AUS), the top maker of networking equipment, declined in Nasdaq trading after Chief Executive Officer John Chambers (http://search.bloomberg.com/search?q=John+Chambers&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) forecast the first revenue drop in five years because of the financial crisis.

Sales (http://www.bloomberg.com/apps/quote?ticker=CSCO%3AUS) will fall as much as 10 percent in the second quarter, which ends in January, Chambers said yesterday on a conference call. In August, he predicted a gain of 8.5 percent from a year earlier.

Business changed course after the credit crunch hit, pushing October orders down 9 percent, Chambers said, adding that his comfort level with the forecast was the lowest since the dot-com bust in 2000. Chambers plans to save $1 billion in costs (http://www.bloomberg.com/apps/quote?ticker=CSCO%3AUS) over the next three quarters by curbing hiring, business travel and relocations.

``He's normally a very optimistic guy, so when you hear him talk about the tone of business being what it is now, I don't even know what to say,'' said Chuck Heath (http://search.bloomberg.com/search?q=Chuck+Heath&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), an analyst at UMB Investment Advisors in Kansas City, Missouri, who recommends (http://www.bloomberg.com/apps/quote?ticker=CSCO%3AUS) buying the shares. UMB owns about 760,000 Cisco shares as part of $11 billion in assets. ``It just makes you want to throw up your hands and give up.''

touchring
11-06-08, 12:16 PM
As a user I am very keen on open source software -- but never understood the business model.
ThePythonicCow, could you explain the business model briefly please? How and where does the money flow?


I think PC is referring to Enterprise open source as opposed to end user open source programs like Firefox. The Enterprise model works on service, so the software is usually non-unmaintainable by the user, so he ends up paying more money to engage the service of a professional.

ThePythonicCow
11-06-08, 01:40 PM
I think PC is referring to Enterprise open source as opposed to end user open source programs like Firefox. The Enterprise model works on service, so the software is usually non-unmaintainable by the user, so he ends up paying more money to engage the service of a professional.
Yes, some markets, such as Enterprise, are much smaller.

The market, for example, for computers to perform analysis of wing failure on Space Shuttles has a size of about one. I've got a plaque that used to hang on my wall from my work in such an effort.

I am oversimplifying a bit here; perhaps it would be helpful to think of it like the automobile business. Just because there are bazillions of cars in the world doesn't mean that the business model that applies to designers of 12 cylinder Ferrari engines is a "large numbers" business model.

The world of software has a rich variety of business models. The Linux operating system for example is a major or dominant player in such product markets as handheld smart phones, network routers, and the worlds largest super computers. Such markets have very different business models and sizes.

ThePythonicCow
11-06-08, 01:49 PM
As a user I am very keen on open source software -- but never understood the business model.
ThePythonicCow, could you explain the business model briefly please? How and where does the money flow?
The situations in which Open Source makes good business sense are those in which the software is not ones primary competitive advantage, and in which it makes more economic sense to treat the software as a shared commodity, which you and your competitors share in developing, as it keeps down the costs of each of you and raises the value and quality of what you can deliver to your customers.

That may not sound like a persuasive business case until you imagine for a moment that you are the sole remaining competitor in such a market who is still trying to depend on proprietary software that only you develop. You cannot compete. Your software development costs kill you, and your customers don't like paying more money to be locked into a solution that will die a horrible death if your company abandons that product line.

A similar model to Open Source has been seen for millenia in the research done at Universities and by interested lay people. This is work shared by all where each stands on the shoulders of their predecessors. Accomplishments are possible that could not be done in the private world of patents and trade secrets.

ThePythonicCow
11-06-08, 01:54 PM
Now vendors can and many do provide both an MSRP and a "floor" price. The aggregate price impact across the economy might be substantial if this becomes common practice–once the depression ends, that is.

That's an interesting bit of news - thanks, EJ.

ThePythonicCow
11-06-08, 02:01 PM
I wrote above:
your customers don't like paying more money to be locked into a solution that will die a horrible death if your company abandons that product line.Correction.
your customers don't like paying more money to be locked into a solution that will die a horrible death when your company abandons that product line.
Every proprietary software product line is abandoned, sooner or later.

With Open Source, the former customers and continuing users of that product can keep it going, for as long as they are interested, perhaps decades after the original sponsoring company has gone bankrupt.

LazyBoy
11-07-08, 09:21 AM
He told me that he was at an auction last week of several fairly new 3 bedroom homes on 4 acres across the street from a local lake here in New Hampshire with water rights and they were selling for $35K each at auction.
What lake/where? I love NH lake country...

DemonD
11-11-08, 05:28 PM
As the main post in this thread states, we are definitely in deflation right now. The question is, how long will this go on? Some commentators are predicting a possible multi-year rally in the dollar. I'm not sure that this is possible considering the trillions of dollars being pumped out from our goobermint. But I'd like to see the itulipers opinions on this.

phirang
11-11-08, 10:40 PM
you wont get inflation without a tbill minksy moment.

till then, i advise having a strong short position against "inflation hedges": this could get really ugly.

that said, i'll wait for the end of the weak to get short anything...