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EJ
01-27-09, 04:16 PM
http://www.itulip.com/images/fedcam.gifDeflationistas, inflationistas, and hyperinflationistas

Our deflationista sparring partners were recently joined by a new voice, both thoughtful and earnest. We exchanged a few emails and found his case so compelling, his belief so pure, that the iTulip team was compelled to spring into action with Emergency Plan B to ensure that the central element of our now ten-year-old Ka-Poom Theory of post-bubble disinflation followed by inflation remains intact.

We deployed a data collection tool that we readied for just such an occasion, the iTulip Flying Fed Spy Cam, a camera and transmitter mounted on a tiny, radio-controlled helicopter, shown to scale above, ready to go to collect the critical intelligence at a moment’s notice. Faced with the possibility that the deflationistas had secretly located new data we have not seen since 1999, revelatory evidence that the Fed had lost its money creation mojo, our standby team launched the covert reconnaissance flight on short notice. Could the deflationistas be right? Is it possible that the Fed can't print? Can the government fail to execute double entry bookkeeping?
Overview of Credit Bubble Outcome Positions:

Deflationistas believe that the credit bubble that began in 1980 ends with a deflation spiral as in the US in the 1930s, with asset and goods prices falling, leading to self-reinforcing cycle of a collapse in the money supply, credit, and demand, as the Fed’s effort to re-inflate the economy via expansion of credit and the money supply fails. The heart of the argument is that the Fed cannot substitute enough government money and credit fast enough to compensate for the loss of private market money and credit as the credit bubble and economy collapse.

Hyperinflationistas believe that the Fed’s effort to re-inflate the money supply eventually succeed in destroying confidence in the currency. As the recession drags on, nominal tax revenues decline, sovereign creditworthiness declines along with output, and government loses the ability to fund fixed budget liabilities (i.e., those it cannot cut, such as military expenditure during times of war, legal obligations such as pensions, and public safety related expenses such as police and fire protection and infrastructure maintenance) through tax collections or by marketing more government debt to domestic or foreign creditors to finance government budgets. The Federal government begins to print money, that is, currency without an offset of new Federal government debt. Slowly at first, the purchasing power of tax revenue falls. The government prints more money to cover the decline in purchasing power, and a classic hyperinflation cycle sets in. The Hyperinflationistats see this as inevitable.


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

Congress approves spending, the Treasury issues new debt, the
Fed issues new currency against the debt, and the money supply expands.


Inflationistas, led by iTulip in 1999 with our Ka-Poom Theory, follows a middle road. Call us optimists. It assumes no mechanical limitation in the Fed’s and Treasury’s ability to expand the money supply or substitute government for private credit, as depicted in the chart above.

The underlying post credit bubble macro-economic challenge is excessive debt, private and public, foreign and domestic, left over from the credit-dependent FIRE Economy. The US economy has to get rid of a large portion of the left over debt so that the US economy can move forward again. The phrase “get rid of the debt” is the most politically charged of the century, because to write off a debt means to not repay a creditor’s loan – savings -- on the other side of the ledger. To write off our foreign debt, for example, is to ask the Chinese, Japanese, Saudis, Russians and other creditors to forget about all the hard work they put into saving money to use buy US Treasury bonds. Within these countries such a decision is politically unacceptable, especially when economies are weakening as we expected they to during the period of recession that attends post credit bubble debt deflations; no politician can accept a write-off of the people’s hard earned savings at a time when savings are dear -- the US can’t pay, the creditor can’t forgive. Meanwhile the hyperinflationista’s case is building.

Ka-Poom Theory says that the ultimate outcome of this political conundrum problem is built into the structure of the foreign debt itself: if only the US can get its foreign creditors to start selling US debt, the dollar will weaken on global currency markets as dollars are exchanged for domestic creditors’ currencies. The weaker dollar deflates the foreign debt. The more the dollar deflates, the more the debt deflates. Of course, US interest rates and inflation rise to compensate new borrowers, but that increases domestic saving while the domestic inflation deflates the domestic debt, both private (household and business) and public (local and state government). The political question is, in this scenario, which savers are losing? Remember, savers lose when debt is written off, either explicitly or via inflation. The answer is that in inflation, all savers lose. Politically, inflation is a tax on all savers to pay all creditors, but the creditors pay, too, by loss of purchasing power of debts collected. The political advantages of inflation in a debt deflation crisis are obvious: savers and creditors share the pain, and to accomplish it all the government has to do is continue to do what it is already doing, without changing course. That is the basis of Ka-Poom Theory, the first theory of inflation, but not hyperinflation, as an outcome of the credit bubble.
Our highly skilled remote Fed Spy Cam pilot navigated the tiny craft through the cavernous Federal Reserve in Washington, D.C. from the entrance on 950 F Street, N.W. street all the way into the bowls -- and that is the word, believe us -- of the great institution. (If you have ever seen the movie Brazil, you can picture it.) Getting past security was the easy part, the doors guarded by the same men and women who watched over the US banking system for the past dozen years. Our challenge was locating the precise keyboard and monitor used by the Fed employee responsible for executing the day’s “more zeros” order. By comparing our Before Crisis Start and After Crisis Start images, we hoped to validate --- or invalidate – our now ten year old conviction: when faced with the need to print money, sans constraint of a gold standard, the Fed can and will issue more money against new or, in a pinch, existing debt (aka “debt monetization”).

Here are iTulip’s exclusive Before and After shots of the keyboard where the really, really big numbers are entered.


Before... http://www.itulip.com/images/keyboardZERO1.gif After... http://www.itulip.com/images/keyboardZERO2.gif


See that darker shaded area on the zero key in the second picture? Clear evidence that the zero key has indeed seen a lot of action since the Before picture was taken.

For further confirmation we visited the St. Louis Fed’s website where -- lo and behold -- many zeros poured out the other end.


http://www.itulip.com/images/MZMandM22000-2009.gif
Money at Zero Maturity and M2 grow smartly during the recession


MZM and M2 are only minor parts of the money supply. To see the full power of the zero key, all forms of money need to be considered.


http://www.nowandfutures.com/images/fed_all_short_stacked.png
Source: NowAndTheFuture.com (http://www.nowandthefuture.com/)

To fully stress test the output side of the zeros function, we viewed Fed borrowing displayed as a compound annual rate of change since 1919 and see that the 3.1 sextillion percent rise shows the Fed’s zero generating capacity fully intact.


http://www.itulip.com/images/BORROWcompundannualratechange1919-2009.gif
No zeros shortage here


Our joke, admittedly overwrought, is that nothing prevents the Fed from expanding government credit or the money supply to compensate for any deficiency in money and credit creation in the private credit markets.

Once past this first part of the deflationista's argument, the next is the "you take a horse to water but can't make him drink" argument, that the Fed can create all the money in the world but it can't make households and businesses spend it. The key measure of how much money is getting spent is the velocity of money. Arguably, velocity slowed since the Q4 2008 period of deleveraging, but here too the Fed is making "progress," if that is the word.


http://www.nowandfutures.com/images/velocity_weekly13.png
Velocity of money -- things are looking up!
Source: NowAndTheFuture.com (http://www.nowandthefuture.com/)

Time and again, an increase in the money supply eventually expresses itself as higher prices. But the Fed can also draw that money supply down in the future, to lower inflation. The bond markets have been betting that it can, and will, until recently.


http://www.itulip.com/images/treasuryyieldcurve2006-2009.gif


This modest recent shift away from treasury bonds has been widely reported as signalling an increased appetite for risk. Alternatively, it may signal increased concern about future inflation.

The Fed can expand its balance sheet virtually infinately to increase the money supply to avert a deflation spiral that the deflationistas expect, and can reverse the process to avert an inflation spiral in the future that the hyperinflationsitas expect. What the Fed and Treasury cannot do, however, is increase the purchasing power of the money created, regardless of quantity, or the creditworthiness of the US. These are only earned by sound fiscal, economic, and trade policy, and here the US, in the name of fighting a short term crisis, is heading in the wrong direction, with stimulus programs without a clear return on investment, and spending commitments that bring the nation's global credit limit into question.

For a nation with so much internal and external debt, inflation is not only possible but also the most politically convenient outcome in the long run, and one that the current structure of debt allows without the exertion of political will to deal with the debt in a way that diffuses the growing conflicts of interest between debtors and creditors as the crises deepens.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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cobben
01-27-09, 04:50 PM
Perhaps there was some confusion in the deflationista camp because of the serious shortage of zeroes in the world?

Don't recall where I read this just now, but the gist was that a new deposit of zeroes was recently discovered in Zimbabwe, but it is uncertain whether they can be mined and exported quickly enough and in sufficient quantities to supply the rest of the world.

Mega
01-27-09, 05:35 PM
Yes, i agree with your story Ej, makes sense...Thanks.
Mike

kartius919
01-27-09, 06:07 PM
Where will we find the political and social will power to ween ourselves off of cheap foreign goods and energy? Inflation will only result in higher cost of living in the future, which in turn means more debt or lowered living standard. The US workforce is priced out of many markets and thus will never recover without protectionist policies or a significant drop in real wages.

The US taxpayer cannot pay for the debt levied on this country over the past decades for stupid wars via taxation. The Gov't debt is facing parabolic growth and higher interest rates will not fix the problem, only expedite the coming crash. The only option is the printing press and it will be used without prudence or aforethought. If you need an example simply look no further then the bailout and the incredibly wasteful and illconceived stimulus package. Why do we need more tax cuts when our nation is wallowing in debt? Why is capital gains taxed at 15% allowing the wealthiest Americans to skirt almost tax free? The well-entrenched interests in DC (ie. corruption) have our leaders by the gonads and nothing will change. We have tough choices to make, but no one is willing to make them. The American way of life is non-negotiable. Hahaha, it won't be negotiated, it will be by gunpoint.

Once you open the printing spigot, I highly doubt we have the will to close it. When Germany began its printing campaign did it say, "Yes, I want a political and economic collapse only if you can guarantee a resultant rise of a fascist dictator to boot."

The Outback Oracle
01-27-09, 06:32 PM
Hmmmmmmmmm I don't wish to hijack this piece as obviously it is a really helpful reminder to us all of reality. However............The answer is that in inflation, all savers lose. Politically, inflation is a tax on all savers to pay all creditors, but the creditors pay, too, by loss of purchasing power of debts collected. The political advantages of inflation in a debt deflation crisis are obvious: savers and creditors share the pain, and to accomplish it all the government has to do is continue to do what it is already doing, without changing course. That is the basis of Ka-Poom Theory, the first theory of inflation, but not hyperinflation, as an outcome of the credit bubble.

Now, I'm a bit confused here by the term "creditors" and how "creditors pay, too, by loss of purchasing power of debts collected."
Now by creditors do we mean "A creditor is a party (e.g. person, organization, company, or government) that has a claim to the services of a second party. It is a person or institution to whom money is owed. [1]The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property or service. The second party is frequently called a debtor or borrower. The first party is the creditor, which is the lender of property, service or money."
So, in this case as per EJ's writing, The Creditor is some intermediary other than the original saver. In this case what EJ says about the creditor losing as well is correct. "but the creditors pay, too, by loss of purchasing power of debts collected."
However what is not then correct is the statement " Politically, inflation is a tax on all savers to pay all creditors,"
Inflation is a tax on all savers to pay all DEBTORS...not Creditors

Further a "saver" is actually a creditor as well unless he stuffs the money under his mattress in some form.

I would have thought if we sort this out it puts a slightly different slant on the argument. The Debtors receive all the benefit (yet again) and it costs them nothing. By definition, this will result in even more debt.
I'd appreciate a comment or clarification here.

*T*
01-27-09, 06:35 PM
EJ, you just convinced me of the hyperinflation case. No way will they withdraw that liquidity until the currency has already collapsed. Rates will not rise because the Fed will be buying treasuries. The adjustment will come through the exchange rate.

Planetary Weimar, here we come.

My missus is being made redundant, my contract is over this October, I have lots of gold.

In the land of the blind the one-eyed man is king.

BadJuju
01-27-09, 06:50 PM
EJ, you just convinced me of the hyperinflation case. No way will they withdraw that liquidity until the currency has already collapsed. Rates will not rise because the Fed will be buying treasuries. The adjustment will come through the exchange rate.

Planetary Weimar, here we come.

My missus is being made redundant, my contract is over this October, I have lots of gold.

In the land of the blind the one-eyed man is king.

Can you make an argument as to why it would be politically-expedient to do so for them?

bda_guy
01-27-09, 06:56 PM
I work for reinsurance company with a multi-billion dollar investment portfolio that is heavily concentrated in high-grade corporate and government fixed income securities (as do most insurance companies in North America). Management here performed a DRAMATIC shift away from long-dated bonds towards shorter duration bonds since Jan 1st in expectation of inflationary pressures over the next 1-2 years! I can definitely confirm EJ's point on this observation.

Jeff
01-27-09, 07:06 PM
Speaking of hyperinflation, a piece on NPR today told of the teacher's union in Zimbabwe turning down an offered thirteen trillion dollar a month salary package, which comes to US$20.

Ouch. Weimar, my ass. Mugabe.

LargoWinch
01-27-09, 07:11 PM
Thank you EJ, Ed and iTulip for another great article and a special kudos to Bart for some insightful and amazing-looking charts once again!

Also, the sprinkle of humor is like the sugar coating on a bad tasting medicine.



However what is not then correct is the statement " Politically, inflation is a tax on all savers to pay all creditors,"
Inflation is a tax on all savers to pay all DEBTORS...not Creditors


Regarding Outback's comment above, I must admit that I am confused as well. I was under the understanding that inflation is a tax on savers, creditor, fix income earners etc., while being a favor to debtors.

According to wiki:
"A creditor is a party (http://en.wikipedia.org/wiki/Party_%28law%29) (e.g. person, organization, company, or government) that has a claim to the services of a second party. It is a person or institution to whom money is owed."

icm63
01-27-09, 07:11 PM
The Fed can expand its balance sheet virtually infinately to increase the money supply to avert a deflation spiral that the deflationistas expect

Q: Does increasing the money supply have a 100% success rate of beating deflation, or is it a fifty fifty chance of being successful ?

You make this statement with such conviction, that supply of money is 100% way to beat the deflation spiral. Why did Japan not beat the deflation spiral even when they had the ability to export to the world NOT in a deflation spiral, I am very sure they printed money as well.

USA's risk of deflationary spiral is even higher is it not, as the rest of the world is in such a mess. Is money supply and govt projects building stuff in 2 or 3 years going to be enough to stop it????

we_are_toast
01-27-09, 07:11 PM
Thanks EJ;

An occasional reaffirmation of Ka-Poom theory, in these rapidly changing economic times, is much appreciated.

I'm anxiously awaiting some thoughts on when you might think we'll be leaving Ka and heading for Poom. Or maybe your best guess as to what we should be looking for in 2009.

BadJuju
01-27-09, 07:18 PM
Or maybe your best guess as to what we should be looking for in 2009.

That would be excellent to hear. :)

Slimprofits
01-27-09, 07:27 PM
EJ, Bart, Fred, Bueller, anyone?

The charts show that ten and twenty year maturity rates have moved in concert with all velocity measures. Am I just stating the obvious? This was to be expected? or is it meaningless? a coincidence?

LargoWinch
01-27-09, 08:38 PM
Q: Does increasing the money supply have a 100% success rate of beating deflation, or is it a fifty fifty chance of being successful ?



icm63, sadly, I think they have a 110% chance.

Lets assume this simplistic scenario for a second: stimulus checks for $10,000 for every US citizen each quarter of each year until the debt is inflated away? That would do it no?

The sad thing, is that the Fed prefers one check of $8.5T to friends and political contributors on Wall St.

Basil
01-27-09, 10:53 PM
Perhaps there was some confusion in the deflationista camp because of the serious shortage of zeroes in the world?

Don't recall where I read this just now, but the gist was that a new deposit of zeroes was recently discovered in Zimbabwe, but it is uncertain whether they can be mined and exported quickly enough and in sufficient quantities to supply the rest of the world.

Yes I heard that they have been actively mining these zeroes for some time but that Mugabe says they are his zeroes and no Western conspiracy is going to take them away. This is why Obama is leading the charge to topple Mugabe. It is a all ruse to abscond with Zimbabwe's zeroes.

bart
01-27-09, 11:01 PM
Q: Does increasing the money supply have a 100% success rate of beating deflation, or is it a fifty fifty chance of being successful ?

You make this statement with such conviction, that supply of money is 100% way to beat the deflation spiral. Why did Japan not beat the deflation spiral even when they had the ability to export to the world NOT in a deflation spiral, I am very sure they printed money as well.

USA's risk of deflationary spiral is even higher is it not, as the rest of the world is in such a mess. Is money supply and govt projects building stuff in 2 or 3 years going to be enough to stop it????

A. It depends. It's a matter of increasing total money supply (including velocity) enough to offset the disinflationary or deflationary effects of debt deflation or money destruction or whatever you want to call it.



Here's a brand new chart that shows the 1920-1940 period, and pay particular attention to base and gov't debt growth starting in 1931, and what happened about two years later to both GDP and CPI. Also note what happened when the growth rate of both dropped off starting in 1935, and what happened about two years later to both GDP and CPI.

Also note that these two relationships are not a guarantee nor am I trying to say that they're the only effect, but I'm rather trying to suggest that you or anyone look at what actually happened (and what is happening now) and make your own judgments.



http://www.nowandfutures.com/d2/base_debt_gdp_cpi1920-1940.png



Some or all of your concerns about Japan are addressed in Deflationistas get the facts wrong about Japan (http://www.itulip.com/forums/showthread.php?t=7463) , especially the last chart in post #23.

bart
01-27-09, 11:06 PM
EJ, Bart, Fred, Bueller, anyone?

The charts show that ten and twenty year maturity rates have moved in concert with all velocity measures. Am I just stating the obvious? This was to be expected? or is it meaningless? a coincidence?

I'm far from 100% certain, but yes I do believe that it was to be expected.

If velocity goes up and all other factors are held constant, relative inflation is the result. Higher inflation and bonds don't like each other, and bonds have a hissy fit...

Munger
01-27-09, 11:12 PM
icm63, sadly, I think they have a 110% chance.

Lets assume this simplistic scenario for a second: stimulus checks for $10,000 for every US citizen each quarter of each year until the debt is inflated away? That would do it no?

The sad thing, is that the Fed prefers one check of $8.5T to friends and political contributors on Wall St.

Giving everyone $10,000 only works if the people believe that the fed will not attempt to stabilize the price level after the deflation risk passes. Otherwise the money will be hoarded and deflation will continue.

c1ue
01-27-09, 11:18 PM
Nice article - and I for one appreciate the levity injection.

I would like to point out a variation in the hyperinflationista view:

The assumption in the article above is that hyperinflationistas don't believe government can stop hyperinflation.

My own view is that government WANTS hyperinflation - defined as more than 100% a year or 10% a month, just not uncontrolled hyperinflation.

Because the scale of debts is such that a mere 100% over 5 years doesn't fix the structural problem. But a half dozen 10% months would both scare money out of passive positions and reduce effective debt significantly.

So the wrinkle for this hyperinflationista is that government CAN theoretically stop hyperinflation, but may not want to. And governments have failed to stop hyperinflation in the past.

goadam1
01-27-09, 11:30 PM
So we get the fed fail video and then evidence that a fair amount but not hyper amount of inflation.

I still don't understand what I should be doing within the itulip philosophy besides owning some gold in this situation.

icm63
01-27-09, 11:38 PM
Bart thanks for the nice chart of the 1940s..

In the 1930's what was the USA government debt/GDP ratio then, was it easy for USA to raise govt debt and borrow and spend its way out of deflation. I assume the USA can raise more funds buy selling its bonds to overseas central bankers (using their savings and surpluses god bless them).

So if the world lends USA the money at good rates there is a good chance then, but what if the rates are not so good, and treasury interest rates rally resulting from such massive supply over lack luster demand.

Thats not so good for asset prices...

ltullos
01-27-09, 11:47 PM
Ka-Poom Theory says that the ultimate outcome of this political conundrum problem is built into the structure of the foreign debt itself: if only the US can get its foreign creditors to start selling US debt, the dollar will weaken on global currency markets as dollars are exchanged for domestic creditors’ currencies. The weaker dollar deflates the foreign debt. The more the dollar deflates, the more the debt deflates. Of course, US interest rates and inflation rise to compensate new borrowers, but that increases domestic saving while the domestic inflation deflates the domestic debt, :confused: both private (household and business) and public (local and state government). The political question is, in this scenario, which savers are losing?.......


It seems to me that rising interest rates in a debtor nation excaberates the problem of defaults, bankruptcy and foreclosures and net DECREASES domestic savings and higher borrowing costs just means more people chasing their tail to borrow more.

Moreover, I believe we were approaching point where rest of world could not fund our increasing budget deficits when they were $400T and their economies were healthy. Who can fund $1T+ deficits when the world is in free fall?

While I've been accepting Ka-Poom for last year since my arrival here thinking debt would have to be reduced through inflation or currency devaluation, I'm now realizing I don't get it as there are some feedback loops that seem to be ignored.

More importantly, should I sell half my gold now and buy back in when it is below $600-700 as Prechter forecasts?

occdude
01-27-09, 11:55 PM
Not to pee in the punch bowel. But what "inflationista" numbers are we talking about and when? As far as the hyperinflationistas go, government is just not that efficient to print money as fast as deflation can take it out, in a foot race between the government (inflation) and the market (deflation) I believe the market EVENTUALLY wins.

Now theres gonna be a lot of "ka's" and "booms" as the govenment acts in reaction to the market, but never with true "shock and awe" because that would require a consensus and the founding fathers in their brillance put plenty of checks and balances in to guarrentee government incompetence (as if guarrantees were necessary).

So look for the stock market and real estate to continue to "ka" and commodities and staples to "boom" simultaneously. This will manifest as declining employment, real estate prices and equities (asset price deflation). The boom will be oil prices, real money ie. gold and most other commodities due to demand destruction from this current deleveraging phase along with the money creation it should be a real doozy.

Contemptuous
01-28-09, 12:16 AM
Deflating assets are not limitless. The full scope of assets disintegrating has a bottom by definition, as assets are finite. Derivatives are inflammatory vapor, but the underlying assets can and do find a floor in valuation. Fiat money instead, is infinite and we've never observed a global economic crash in history before which occurred in a 100% fiat world. There is no "leash" or "governor" built into the fiat money engine, it can accelerate to any level required, not just in the US, but e v e r y w h e r e . I'm thinking the USD can rally for several years, but I'm under no illusion as to which effect can reach out further in time, between asset destruction and fiat money issuance, the fiat money can run a great deal further. IMO the stock market and real estate will NOT continue to KA. Real estate can limp into recovery, but the stock market can react to the upside like a scalded cat. In fact I bet it will, in about six to twelve months.

Big bada-poom in stocks not too far out. You are getting blinded by the current stock market declines into thinking along the trend most recently in motion, i.e. unholy market collapses in progress. IMO a little ways forward it will be setting the floor for a hellacious boom - one for the history books coming up **soon**, and if you say "yeah but what is going to underpin it as all the fundamentals are crap" my read (because I fear and distrust the stock markets anyway and think it's subject to huge sentiment swings) is that fundamentals can often be of overestimated prime mover value also in the equities markets, for longish periods of time anyway. 3-6 trillion of new credit shoved out the door, with banks getting legislated into lending if things get constipated enough - that is all the rocket fuel we'll need to see the DOW scoot up to 30K within five years. I bet that is exactly what we get by 2013-2014 and a great wave of "apparent" renewed prosperity can emanate out from that boom - gargantuan fiat inflation can produce some strange and improbable artifacts.

BTW, in the thick of the largest declines in history, commodities and equites have actually been positively correlated. I think it is in fact less probable to see an equities market ongoing collapse or stagnation alongside soaring commodities. I can imagine a lot of happy faced investors in the North American indexes, looking out a couple of years from now. That describes iTulip's POOM really, just suggesting it's arriving two or three years earlier. :D Deflation in various asset classes and wild inflation in others with steepening unemployment, and then throwing in things like booms in oil and gold - this conjunction of effects make no sense to me.


Not to pee in the punch bowel. But what "inflationista" numbers are we talking about and when? As far as the hyperinflationistas go, government is just not that efficient to print money as fast as deflation can take it out, in a foot race between the government (inflation) and the market (deflation) I believe the market EVENTUALLY wins.

Now theres gonna be a lot of "ka's" and "booms" as the govenment acts in reaction to the market, but never with true "shock and awe" because that would require a consensus and the founding fathers in their brillance put plenty of checks and balances in to guarrentee government incompetence (as if guarrantees were necessary).

So look for the stock market and real estate to continue to "ka" and commodities and staples to "boom" simultaneously. This will manifest as declining employment, real estate prices and equities (asset price deflation). The boom will be oil prices, real money ie. gold and most other commodities due to demand destruction from this current deleveraging phase along with the money creation it should be a real doozy.

bart
01-28-09, 12:56 AM
Bart thanks for the nice chart of the 1940s..

In the 1930's what was the USA government debt/GDP ratio then, was it easy for USA to raise govt debt and borrow and spend its way out of deflation. I assume the USA can raise more funds buy selling its bonds to overseas central bankers (using their savings and surpluses god bless them).

So if the world lends USA the money at good rates there is a good chance then, but what if the rates are not so good, and treasury interest rates rally resulting from such massive supply over lack luster demand.

Thats not so good for asset prices...


Debt/GDP was between 20-40% during the period, and yes it was easy to borrow - and also easy for the Fed to create money too, as the monetary base stats show.
Did you see what happened when both base and debt increased on my chart covering 1920-1940, after a lag? And what happened when they both started dropping in 1935-36, after another similar lag?

I also think you're missing the overall point from EJ and others about the ability of a CB or government to inflate or create money at will. The world does not have to lend any country money in order for inflation to be created.


Additionally, in theory a world wide inflation or hyperinflation could occur without any country lending any other country anything.

icm63
01-28-09, 02:09 AM
I also think you're missing the overall point from EJ and others about the ability of a CB or government to inflate or create money at will. The world does not have to lend any country money in order for inflation to be created.

True, but if USA prints and prints what the point of China and Japan holding loosers, they may as well cut losses and sell, and that will be a lot of paper for the FED to buy up. Agency debt included.

occdude
01-28-09, 02:12 AM
Deflating assets are not limitless. The full scope of assets disintegrating has a bottom by definition, as assets are finite. Derivatives are inflammatory vapor, but the underlying assets can and do find a floor in valuation. Fiat money instead, is infinite and we've never observed a global economic crash in history before which occurred in a 100% fiat world. There is no "leash" or "governor" built into the fiat money engine, it can accelerate to any level required, not just in the US, but e v e r y w h e r e . I'm thinking the USD can rally for several years, but I'm under no illusion as to which effect can reach out further in time, between asset destruction and fiat money issuance, the fiat money can run a great deal further. IMO the stock market and real estate will NOT continue to KA. Real estate can limp into recovery, but the stock market can react to the upside like a scalded cat. In fact I bet it will, in about six to twelve months.

Big bada-poom in stocks not too far out. You are getting blinded by the current stock market declines into thinking along the trend most recently in motion, i.e. unholy market collapses in progress. IMO a little ways forward it will be setting the floor for a hellacious boom - one for the history books coming up **soon**, and if you say "yeah but what is going to underpin it as all the fundamentals are crap" my read (because I fear and distrust the stock markets anyway and think it's subject to huge sentiment swings) is that fundamentals can often be of overestimated prime mover value also in the equities markets, for longish periods of time anyway. 3-6 trillion of new credit shoved out the door, with banks getting legislated into lending if things get constipated enough - that is all the rocket fuel we'll need to see the DOW scoot up to 30K within five years. I bet that is exactly what we get by 2013-2014 and a great wave of "apparent" renewed prosperity can emanate out from that boom - gargantuan fiat inflation can produce some strange and improbable artifacts.

BTW, in the thick of the largest declines in history, commodities and equites have actually been positively correlated. I think it is in fact less probable to see an equities market ongoing collapse or stagnation alongside soaring commodities. I can imagine a lot of happy faced investors in the North American indexes, looking out a couple of years from now. That describes iTulip's POOM really, just suggesting it's arriving two or three years earlier. :D Deflation in various asset classes and wild inflation in others with steepening unemployment, and then throwing in things like booms in oil and gold - this conjunction of effects make no sense to me.
Assuming that any government entity can just "push a button" to create money is assuming that any-one entity has the authority to do that. They are in reaction mode to the market which is in real time, so there will be a lag affect between their creation of money and the markets destruction of credit. Look at all the hoops that the government has to jump through just to get 850B while the market wipes trillions off of bank balance sheets.

As far as the divergence in commodity and equity prices go. Equities are still overpriced maybe not according to trailing PE but absolutely according to future ones which are gonna show a big haircut for the next couple of quarters. Then once equities correct sufficiently to lure investors back in, it will be at very low historic PEs as befits a recovering stock market after a deflationary gang rape. Also dividend yields will have to rise above the paltry 3 percent currently to justify the risk. Try more like 8-10 percent in yields. Now commodities are not just a domestic consideration but a global one. You think Chinas gonna go back to 70s levels of consumption? I dont think so, they'll use a considerable part of their foreign dollar reserves to buy commodities to both spur domestic consumption and build infrastructure, while dropping their dollar peg being too onerous of a burdon to continuously bear and they'll be off to the races establishing a new trading block sans USA,because we'll be a basket case. The dollar with all its propagation and printing is a "dead man walking" it will lose it's foreign reserve status once something is devised to replace it. The world has no choice but to replace it because we will print it into oblivion otherwise. The Chinese are already experimenting using Yuan to settle domestic trades and if they get together with OPEC and design a new currency its all over for dollar hedgemony.

Now since we wont be able to produce energy we need in quantities we need the price will go up. Still needing to establish savings again in this country for financing a new economic paradigm away from FIRE look for decreased domestic consumption and a longer recession in labor, but the government will pay people to stay home and away from flamable objects so that will be inflationary (more dollars, less goods).

Overseas in the east they don't have the credit problems we do, they have a savings base and a poplulation willing to add to it. They have manufactoring infrastructure and a loose regulatory environment to get things done. They are going to come out of this quicker than we will and then they'll be off to the races competing for the same commodities we will which will cause commodities to rise. During the 70s stagflation we did see a decoupling of commodity and equity prices. Up until the "great deleveraging of 08" you saw a big difference in the ratio between the two. The difference is that commodities are in a secular bull market that has corrected and equities are in a flat out bear market to the past decades phony growth.

The big story of the 21st century is that the world is getting alot smaller and we are going to have to COMPETE for finite resources with our other long suffering brothers and sisters elsewhere and at least right now, they've got the jump on us until we get our heads out of our derrieres.

bart
01-28-09, 02:17 AM
True, but if USA prints and prints what the point of China and Japan holding loosers, they may as well cut losses and sell, and that will be a lot of paper for the FED to buy up. Agency debt included.

Fair enough... and although there's lots missing from that view, I think I'll just agree to disagree on the full picture.

photoncounter
01-28-09, 02:33 AM
Also note that these two relationships are not a guarantee nor am I trying to say that they're the only effect, but I'm rather trying to suggest that you or anyone look at what actually happened (and what is happening now) and make your own judgments.

Here's an article that describes how things were in the 1930's compared to now...

Bad news: we're back to 1931. Good news: it's not 1933 yet


http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4339501/Bad-news-were-back-to-1931.-Good-news-its-not-1933-yet.html

Slimprofits
01-28-09, 02:46 AM
I'm far from 100% certain, but yes I do believe that it was to be expected.

If velocity goes up and all other factors are held constant, relative inflation is the result. Higher inflation and bonds don't like each other, and bonds have a hissy fit...

Thank you, Bart.

bart
01-28-09, 02:48 AM
Here's an article that describes how things were in the 1930's compared to now...

Bad news: we're back to 1931. Good news: it's not 1933 yet


http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4339501/Bad-news-were-back-to-1931.-Good-news-its-not-1933-yet.html



There's both some incorrect or incomplete facts there and its also missing many other stat comparisons.

Monetary & fiscal stat comparisons, 1929 and now (http://www.itulip.com/forums/showthread.php?t=6856)

marvenger
01-28-09, 03:29 AM
EJ was saying the government can increase and decrease the money supply to counteract deflation spirals and hyperinflations but they cannot control the purchasing power of the dollar by doing this, especially when they spend on crap programs. Foreigners buying dollars was what was and still is giving the dollar its purchasing power.

*T*
01-28-09, 06:04 AM
Can you make an argument as to why it would be politically-expedient to do so for them?

It isn't politically expedient as a deliberate choice, but to avoid hyperinflation presumes a level of fine control in withdrawing and the ability to withdraw the liquidity without re-imploding the economy. We have already seen the sledgehammer approach from Bernanke.

When the time comes to withdraw the liquidity, the 'balance of risks' will point towards leaving it in the system. Remember the Fed's credibility is based on being effective deflation fighters, not effective inflation fighters. To withdraw would require a cultural shift at the fed, which would only happen after the event.

It's really not wholly different from EJ's scenario, except that I think it will come through disorderly currency adjustment. The adjustment through higher interest rates will not be available as the fed will be buying treasuries.

labasta
01-28-09, 08:26 AM
Another EJ article which is slightly out of my league.

I can see the deflationistas argument as bogus or beaten, but I can't seem to get my head around the difference between inflation and hyperinflation.

Is it true that at the moment the US's creditor nations are not buying as much dollars as before due to the economic slowdown (but they are still buying)?

Would someone be so kind as to continue with that story and show me the difference between the inflation and hyperinflaiton thesis.

Thank you.

we_are_toast
01-28-09, 08:54 AM
What the Fed and Treasury cannot do, however, is increase the purchasing power of the money created, regardless of quantity, or the creditworthiness of the US. These are only earned by sound fiscal, economic, and trade policy, and here the US, in the name of fighting a short term crisis, is heading in the wrong direction, with stimulus programs without a clear return on investment, and spending commitments that bring the nation's global credit limit into question.

For a nation with so much internal and external debt, inflation is not only possible but also the most politically convenient outcome in the long run, and one that the current structure of debt allows without the exertion of political will to deal with the debt in a way that diffuses the growing conflicts of interest between debtors and creditors as the crises deepens.

(http://www.itulip.com/forums/showthread.php?t=1032)

The above statement implies that the advice you gave to your congressional contacts was not taken, or had a negligible impact on the legislation currently going through congress. I have argued in other threads that I thought it might not be an efficient use of iTulip's analytic skills to propose a detailed solution to the current crises, but rather a better use would be to analyze the solution that will actually get implemented.

I would be very interested in knowing what brought you to make the above statement.

FRED
01-28-09, 09:46 AM
The above statement implies that the advice you gave to your congressional contacts was not taken, or had a negligible impact on the legislation currently going through congress. I have argued in other threads that I thought it might not be an efficient use of iTulip's analytic skills to propose a detailed solution to the current crises, but rather a better use would be to analyze the solution that will actually get implemented.

I would be very interested in knowing what brought you to make the above statement.

If you'd like this answered, recommend you post your question as an Ask EJ (http://itulip.com/forums/forumdisplay.php?f=66) in the subscription area.

Charles Mackay
01-28-09, 10:00 AM
Maybe the secret fed cam should be sent in today? Rick Santelli reports of secret FED meetings going on Tues and Wed. this week... all very hush hush. :eek:

I think the only way EJ's soft landing is possible is if capital controls and even limits to bank withdrawals are implemented first. The smart money is just too mobile and we all have trigger happy fingers on our own keyboards!

I can foresee a scenario where the crisis intensifies allowing the above to be legislated and then the massacre of the savers takes place.

That is why I'm not sure trying to time the exit from your T Bill stash is such a good idea. I think it's rather risky to not have a significant chunk of your portfolio already protected.

vinoveri
01-28-09, 11:47 AM
Giving everyone $10,000 only works if the people believe that the fed will not attempt to stabilize the price level after the deflation risk passes. Otherwise the money will be hoarded and deflation will continue.

So instead, as has been suggested before, give everyone a debit card for $12k which they must spend at least $1k pe rmonth over the following year or lose it. No hoarding possible and no deflation. $12k x 100million households = $1.2trillion - a small fraction of what's been committed to the banking/investors sector so far.

Equity while a fundamental concept of justice, seems to be often ignored by the elite.

phirang
01-28-09, 11:58 AM
So instead, as has been suggested before, give everyone a debit card for $12k which they must spend at least $1k pe rmonth over the following year or lose it. No hoarding possible and no deflation. $12k x 100million households = $1.2trillion - a small fraction of what's been committed to the banking/investors sector so far.

Equity while a fundamental concept of justice, seems to be often ignored by the elite.

The treasury market would explode, destroying asset prices.

Epic FAIL.

vinoveri
01-28-09, 12:13 PM
The treasury market would explode, destroying asset prices.

Epic FAIL.

It needs to pop IMO.
What's holding it together now?

phirang
01-28-09, 01:14 PM
It needs to pop IMO.
What's holding it together now?

client oil exporters...

grapejelly
01-28-09, 01:40 PM
The aim of CBs and government is the same. They want to drive asset prices higher in nominal currency.

They are unhappy because asset prices are falling, in currency terms. I use the word "currency" to mean fiat of course.

People interpret this fall as deflation but it is not. I won't rehash the argument I already made. Just pointing out that the effect of assets falling in currency terms is a dramatic drop in the ability of banks to lend and borrowers to borrow.

So less currency will be borrowed into existence.

The government and CBs will NEVER tolerate this. Therefore they will, whatever the cost, put money into the banks in unlimited amounts, without appearing to do so, an force banks to lend and borrowers to borrow.

All to drive asset prices up in currency terms.

This *will* happen.

Mish has long argued "you can't force borrowers to borrow." But in reality you can. You can drop interest rates to zero and make credit available in unlimited amounts.

You reliquify your captive nationalized banks through good-bank bad-bank.

Take over all the bum assets. And don't pay interest on reserves. Banks must pay interest to depositors, so they will be forced to try to lend.

The government will be their primary client, of course. The government will borrow in almost unlimited amounts, and pay a low rate but one that allows the banks to make a "profit".

The money so created will then filter into the economy.

The government spending will increase the share of GDP taken by the government and this is highy destructive to productivity and wealth.

You will see a larger flood of wealthy successful people move their assets out of the US.

It is not fun. The stuff happening in the UK is probably a few years ahead of the US, or maybe a few months...but the same thing will happen in the US.

BadJuju
01-28-09, 01:43 PM
It is not fun. The stuff happening in the UK is probably a few years ahead of the US, or maybe a few months...but the same thing will happen in the US.

I would certainly hope it is a few years ahead, if only to give me more time to prepare. :mad:

Contemptuous
01-28-09, 02:05 PM
Fully agree with your assessment as to the very powerful pincer-effects converging upon commodities prices. Probably one of the best longer term investment stories out there stretching right out into the 2030's. My comment about "no decoupling" between commodities and equities was in reference to the extent of market crashes. During crashes they move together up or down more often than not. My only point of disagreement with your call is that the equities markets **must** carry out a long crash or remain lifeless after the current crash. I believe there is a very high probability the equity indexes in the US are going to soar - more than the commodities even - and all within the next 5 years. Your PE valuations are old school. The monetary events in progress have not even the most remote parallel in the past 50-100 years. That is not an insignificant point with regard to casting bets on the near future direction of equities. IMO US equity indexes have a good shot at spearheading the global economic recovery, with the monetary *cures* in progress serving as nitro rocket fuel. I know, it seems wildly implausible at the present time.


Assuming that any government entity can just "push a button" to create money is assuming that any-one entity has the authority to do that. They are in reaction mode to the market which is in real time, so there will be a lag affect between their creation of money and the markets destruction of credit. Look at all the hoops that the government has to jump through just to get 850B while the market wipes trillions off of bank balance sheets.

As far as the divergence in commodity and equity prices go. Equities are still overpriced maybe not according to trailing PE but absolutely according to future ones which are gonna show a big haircut for the next couple of quarters. Then once equities correct sufficiently to lure investors back in, it will be at very low historic PEs as befits a recovering stock market after a deflationary gang rape. Also dividend yields will have to rise above the paltry 3 percent currently to justify the risk. Try more like 8-10 percent in yields. Now commodities are not just a domestic consideration but a global one. You think Chinas gonna go back to 70s levels of consumption? I dont think so, they'll use a considerable part of their foreign dollar reserves to buy commodities to both spur domestic consumption and build infrastructure, while dropping their dollar peg being too onerous of a burdon to continuously bear and they'll be off to the races establishing a new trading block sans USA,because we'll be a basket case. The dollar with all its propagation and printing is a "dead man walking" it will lose it's foreign reserve status once something is devised to replace it. The world has no choice but to replace it because we will print it into oblivion otherwise. The Chinese are already experimenting using Yuan to settle domestic trades and if they get together with OPEC and design a new currency its all over for dollar hedgemony.

Now since we wont be able to produce energy we need in quantities we need the price will go up. Still needing to establish savings again in this country for financing a new economic paradigm away from FIRE look for decreased domestic consumption and a longer recession in labor, but the government will pay people to stay home and away from flamable objects so that will be inflationary (more dollars, less goods).

Overseas in the east they don't have the credit problems we do, they have a savings base and a poplulation willing to add to it. They have manufactoring infrastructure and a loose regulatory environment to get things done. They are going to come out of this quicker than we will and then they'll be off to the races competing for the same commodities we will which will cause commodities to rise. During the 70s stagflation we did see a decoupling of commodity and equity prices. Up until the "great deleveraging of 08" you saw a big difference in the ratio between the two. The difference is that commodities are in a secular bull market that has corrected and equities are in a flat out bear market to the past decades phony growth.

The big story of the 21st century is that the world is getting alot smaller and we are going to have to COMPETE for finite resources with our other long suffering brothers and sisters elsewhere and at least right now, they've got the jump on us until we get our heads out of our derrieres.

bart
01-28-09, 02:41 PM
Assuming that any government entity can just "push a button" to create money is assuming that any-one entity has the authority to do that. They are in reaction mode to the market which is in real time, so there will be a lag affect between their creation of money and the markets destruction of credit.

TARP was created within something like 2-3 weeks, and for government that's virtually instantaneous. I submit that the current delay for the $850+ billion has much more to do with the new administration than anything else. Also note that Federal debt has been growing at over 10% annually for months.

And I urge caution on not taking what the Fed has done so far and for about a year into account, along with applicable monetary lags etc.

As of last October, I had estimated US credit & money destruction at about $3.6 trillion and to date the Fed & Treasury have added/created about $3.5 trillion... just a for what its worth.

photoncounter
01-28-09, 03:19 PM
I believe there is a very high probability the equity indexes in the US are going to soar - more than the commodities even - and all within the next 5 years. Your PE valuations are old school. The monetary events in progress have not even the most remote parallel in the past 50-100 years. That is not an insignificant point with regard to casting bets on the near future direction of equities. IMO US equity indexes have a good shot at spearheading the global economic recovery, with the monetary *cures* in progress serving as nitro rocket fuel. I know, it seems wildly implausible at the present time.

Lukester, here's an article I found in another thread that is predicting a stock market bull in the near future...not the same as your views, but it will be interesting to see how this pans out. FYI, I am bearish, but what do I know ! As they say - "financial markets can remain irrational longer than you can remain solvent" :)

http://www.kitco.com/ind/Gerbino/jan272009.html

What Happens Next


The economy stagnates for another 9-12 months then turns around.
Unemployment goes down with the induced economic upturn.

The stock market rallies but never gets above its old highs.
Inflation comes back with a vengeance.
Commodities resume their bull market and turn the deflationistas into inflation believers.
Interest rates will go up with inflation and probably to much higher levels.
The stock market will go down when interest rates start going up.
Long term bonds will become the worst investment in the world.
The dollar will go down but so will other currencies as many world governments print their way out of their economic woes as well.
Gold will go to new highs.
Housing and real estate will recover but higher interest rates will slow this sector down considerably in the future.
The gold and silver mining stocks will become the best performing sector on Wall Street for many years.
The price of oil will go up due to inflation and global production declines of 5-8% per year from most of the largest oil fields in the world.
The U.S. “recovery” will help the world recover and almost all countries will have another artificial economic expansion from all the paper money they have printed as well.
China and India will create more shortages of basic materials and commodities by the sheer size of the populations and their economic and industrial progress.
The U.S. will have even more economic dislocations from all the new paper money and debt taken on by Washington.
The country gets set up for the next horrible recession some time in about 3-4 years.

Chris Coles
01-28-09, 06:49 PM
First of all the stimulus package has just been passed. http://news.bbc.co.uk/1/hi/world/americas/7857276.stm

<TABLE class=storycontent cellSpacing=0 cellPadding=0><TBODY><TR><TD colSpan=2>Congress passes economic package



</TD></TR><TR><TD class=storybody><!-- S BO --><!-- S IIMA --><TABLE cellSpacing=0 cellPadding=0 width=226 align=right border=0><TBODY><TR><TD>http://newsimg.bbc.co.uk/media/images/45423000/jpg/_45423561_006797083-1.jpg Mr Obama's package was passed by 244 votes to 189</TD></TR></TBODY></TABLE><!-- E IIMA --><!-- S SF -->The US House of Representatives has passed President Barack Obama's $825bn (£576bn) economic stimulus package.


</TD></TR></TBODY></TABLE>

Surely, the underlying reason for the package is to try and overcome the reduction in tax income caused by the financial sector problems over the last year or so? In that case, there will be no incentive for government to just as suddenly try and stop the inflationary period once it starts as the upturn in the economy will of itself bring in more tax income.

So surely that is the underlying mechanism that prevents moderation?

Once the stimulus takes traction, revenue increases... wow! so now EJ rushes in and says hey you guys, take your foot off the accelerator and they look at him as though he is the proverbial inventor with a new idea.

Not likely they say, not invented here. We like the stimulus, look it gives a boost.

And so the wheel turns faster and faster. Food for thought?

grapejelly
01-28-09, 06:51 PM
the stimulus will make things worse. The economy will not recover. There will be one more stimulus, then another. Then another.

This is exactly what caused the Great Depression.

Pericles
01-28-09, 07:09 PM
Speaking of hyperinflation, a piece on NPR today told of the teacher's union in Zimbabwe turning down an offered thirteen trillion dollar a month salary package, which comes to US$20.

Ouch. Weimar, my ass. Mugabe.

Missing: Almost a year of zeros...
http://farm4.static.flickr.com/3154/2807683018_4bac9edd70.jpg?v=0

Btw, a "castle" is a beer; not a stone palace on a European hill ;-)

Seriously though, while buying into ka-poom theory, I look for disconfirming evidence. As a radical option, would a "literal helicopter Ben" affect the thinking? (the post on the next day summarises the feedback this fund manager got) (http://brontecapital.blogspot.com/2009/01/why-federal-reserve-should-literally.html).

Inconceivable? ("The Princess Bride" comes to mind)

"...the whole idea won’t work because it is actually not possible to be that irresponsible..."
With a history of irresponsibility as a guide, perhaps "not possible" should be introduced to Taleb?

The Outback Oracle
01-28-09, 07:19 PM
Missing: Almost a year of zeros...
http://farm4.static.flickr.com/3154/2807683018_4bac9edd70.jpg?v=0

Btw, a "castle" is a beer; not a stone palace on a European hill ;-)

Seriously though, while buying into ka-poom theory, I look for disconfirming evidence. As a radical option, would a "literal helicopter Ben" affect the thinking? (the post on the next day summarises the feedback this fund manager got) (http://brontecapital.blogspot.com/2009/01/why-federal-reserve-should-literally.html).

Inconceivable? ("The Princess Bride" comes to mind)

"...the whole idea won’t work because it is actually not possible to be that irresponsible..."
With a history of irresponsibility as a guide, perhaps "not possible" should be introduced to Taleb?
Yeah but at least the beer is as cheap as water!!!

BadJuju
01-28-09, 07:37 PM
the stimulus will make things worse. The economy will not recover. There will be one more stimulus, then another. Then another.

This is exactly what caused the Great Depression.

You sound like you are depressed. You need sufficient stimulation. :p

bill
01-28-09, 08:03 PM
Surely, the underlying reason for the package is to try and overcome the reduction in tax income caused by the financial sector problems over the last year or so? In that case, there will be no incentive for government to just as suddenly try and stop the inflationary period once it starts as the upturn in the economy will of itself bring in more tax income.

So surely that is the underlying mechanism that prevents moderation?

Once the stimulus takes traction, revenue increases... wow! so now EJ rushes in and says hey you guys, take your foot off the accelerator and they look at him as though he is the proverbial inventor with a new idea.

Not likely they say, not invented here. We like the stimulus, look it gives a boost.

And so the wheel turns faster and faster. Food for thought?

5:min to 6:min says it all
http://www.pbs.org/nbr/site/research/learnmore/090122_buffett/

seanm123
01-28-09, 08:16 PM
The above statement implies that the advice you gave to your congressional contacts was not taken, or had a negligible impact on the legislation currently going through congress. I have argued in other threads that I thought it might not be an efficient use of iTulip's analytic skills to propose a detailed solution to the current crises, but rather a better use would be to analyze the solution that will actually get implemented.

I would be very interested in knowing what brought you to make the above statement.

Toast -Special interest groups write nearly half of the 10,000 bills that the House of Representatives and the Senate consider passing into law each congressional term. My best guess is the leaders in Congress haven't written a bill in years perhaps since they were freshmen, I have read that few even read the bills before voting. We (iTulip members) do not have a PAC or lobbying group as part of our little online learning university. Even if we did decide to fund lobbyists or start a PAC we would need lots of veterans of DC and their contacts to deal with the partisan politics that is Washington. It gets very expensive.

I have some experience since I worked for a PAC back in the 90's during Telecom deregulation, the task of getting and audience with Congresssmen and Senators is daunting. If anything take a look at the public outcry that forced the original Tarp Bill vote to fail and then the forces that made it pass, namely the threats of martial law and lobbyists.

http://www.aacps.org/aacps/boe/INSTR/CURR/COMED/HSWebQuest/Frick2/trv03an4.gif

I feel that most of us here are simply along for the ride, and like most I am trying to protect my wealth and profit where I can. I would love to be able to infuence the process but alas just watching the inaguration and who was up on the dias and reading about who funded it tells me volumes.


EJ has stated his case as to what he is up to with our politicans, and I can tell you for sure he is pissing in the wind unless someone is willing fork over enough money to challenge the lobbyists from the dark side.

flintlock
01-28-09, 08:58 PM
Sadly, I have to agree with the above. :(

My guess is we'll see about a 50/50 split on this new bill between pork and real stimulus. So the pigs will continue to line up at the trough.

powersown
01-29-09, 12:15 AM
Sadly, I have to agree with the above. :(

My guess is we'll see about a 50/50 split on this new bill between pork and real stimulus. So the pigs will continue to line up at the trough.

For what it's worth, Rush Limbaugh quoted a source today stating that approximately 12% of the bill could be considered real stimulus.

Chris Coles
01-29-09, 04:29 AM
5:min to 6:min says it all
http://www.pbs.org/nbr/site/research/learnmore/090122_buffett/

Bill, thank you for that, a wonderful interview, pity that the interviewers microphone was not well positioned. But a transcript is also available and I took the liberty of passing this small part on to everyone.

http://www.pbs.org/nbr/site/onair/transcripts/090122t/

WB: Well I've learned my lessons before that. I read a book what is it, almost 60 years ago roughly, called The Intelligent Investor and I really learned all I needed to know about investing from that book, in particular chapters 8 and 20 so I haven't changed anything since.

SG: Graham and Dodd?

WB: Well that was Ben Grahams' book The Intelligent Investor. Graham and Dodd goes back even before that which was important, very important. But you know you don't change your philosophy assuming you think have a sound one and I picked up I didn't figure it out myself, I learned it from Ben Graham, but I got a framework for investing that I put in place back in 1950 roughly and that framework is the framework I use now. I see different ways to apply it from time to time but that is the framework.

SG: Can you describe what it is? I mean what is your most important investment lesson?

WB: The most important investment lesson is to look at a stock as a piece of business not just some thing that jiggles up and down or that people recommend or people talk about earnings being up next quarter, something like that, but to look at it as a business and evaluate it as a business. If you don't know enough to evaluate it as a business you don't know enough to buy it. And if you do know enough to evaluate it as a business and its selling cheap, you buy it and don't worry about what its doing next week, next month or next year.

Slimprofits
01-29-09, 04:45 AM
Thanks Bill!

This is a great line:
We've got money left, but I love spending money. Cash makes me very unhappy.

I think this is the par that Bill was referring to:


SG: We all know that in the long run everything is going to work out, but as you analyze President Obama's economic plan, what do you think are the trade-offs? What are the consequences?

WB: Well the trade-off... the trade-off basically is that you risk setting in motion forces that will be very hard to stop in terms of inflation down the road and you are creating an imbalance between revenues and expenses in the government that is a lot easier to create than it will be to correct later on, but those are problems worth taking on, but you don't get a free lunch.

sunskyfan
01-29-09, 11:58 AM
The only thing that I quibble about in the analysis is that the FED does have an infinite balance sheet but it cannot move infinitely fast let alone the need for this influence to be EVENLY inlfuentual across the economy. We are hitting a asymptotic even in the economy. Whether we approach infinite from the positive side (inflation) or the negative side (deflation) only makes a difference in the amount of time to get there. Things seem to be moving very fast to me. I have never thought much of "Armegeddon" thinking but then again I never thought I would loose money as a defrense researcher during a war.

raja
01-29-09, 12:18 PM
Once past this first part of the deflationista's argument, the next is the "you take a horse to water but can't make him drink" argument, that the Fed can create all the money in the world but it can't make households and businesses spend it.
With a 10% or 20% unemployment rate in the works, and 30% or more of the retail stores on the way to being shuttered, I don't think the American consumer is going to be in the mood to spend, even if the gov't gave them the money, much less lent it to them putting them further in debt, even at no interest. Looks what's happening right now as an indicator of things to come?

And the stimulus package? Do you think the government will be able to foster trust in "the system" by the time the stimulus "takes effect"? Things will be much worse by that time.

I'm not saying this means deflation, but IMO it certainly deflates iTulip's contention that the deflationistas are wrong on this point.

If people think that money will become worthless through inflation (when they learn what that means), they might spend it . . . but probably more for survival items than for cars, computers and TVs . . . and to pay down debt.

FRED
01-29-09, 12:30 PM
With a 10% or 20% unemployment rate in the works, and 30% or more of the retail stores on the way to being shuttered, I don't think the American consumer is going to be in the mood to spend, even if the gov't gave them the money, much less lent it to them putting them further in debt, even at no interest. Looks what's happening right now as an indicator of things to come?

And the stimulus package? Do you think the government will be able to foster trust in "the system" by the time the stimulus "takes effect"? Things will be much worse by that time.

I'm not saying this means deflation, but IMO it certainly deflates iTulip's contention that the deflationistas are wrong on this point.

If people think that money will become worthless through inflation (when they learn what that means), they might spend it . . . but probably more for survival items than for cars, computers and TVs . . . and to pay down debt.

Okay, let's try it this way. Here is Mish vs iTulip in charts.


http://www.itulip.com/images/inflation-cpiu-dec2deciTulip.gif

iTulip Ka-Poom Theory of cycles of asset price inflation, disinflation, and reflation.
The last line with the arrow is the disinflation forecast.
The rest of the chart is right out of economagic (http://www.economagic.com/). How's that for a disinflation forecast?

http://www.itulip.com/images/inflation-cpiu-dec2decMISH.gif

Mish's "Deflation All The Time Theory" sees deflation even when inflation is rampant


What if we did it the other way? What if we said, "Inflation, inflation, inflation, inflation, inflation, inflation..." through periods of both inflation and disinflation? Then we'd be "wrong" when the disinflation part of the cycle and "right" when inflation occurred.

raja
01-29-09, 12:58 PM
Okay, let's try it this way. Here is Mish vs iTulip in charts.


What if we did it the other way? What if we said, "Inflation, inflation, inflation, inflation, inflation, inflation..." through periods of both inflation and disinflation? Then we'd be "wrong" when the disinflation part of the cycle and "right" when inflation occurred.
You have completely missed my point :eek:


Originally Posted by raja http://itulip.com/forums/images/buttons/viewpost.gif (http://itulip.com/forums/showthread.php?p=73190#post73190)
With a 10% or 20% unemployment rate in the works, and 30% or more of the retail stores on the way to being shuttered, I don't think the American consumer is going to be in the mood to spend, even if the gov't gave them the money, much less lent it to them putting them further in debt, even at no interest. Looks what's happening right now as an indicator of things to come?

And the stimulus package? Do you think the government will be able to foster trust in "the system" by the time the stimulus "takes effect"? Things will be much worse by that time.

I'm not saying this means deflation, but IMO it certainly deflates iTulip's contention that the deflationistas are wrong on this point.

If people think that money will become worthless through inflation (when they learn what that means), they might spend it . . . but probably more for survival items than for cars, computers and TVs . . . and to pay down debt.

FRED
01-29-09, 01:12 PM
You have completely missed my point :eek:


Originally Posted by raja http://itulip.com/forums/images/buttons/viewpost.gif (http://itulip.com/forums/showthread.php?p=73190#post73190)
With a 10% or 20% unemployment rate in the works, and 30% or more of the retail stores on the way to being shuttered, I don't think the American consumer is going to be in the mood to spend, even if the gov't gave them the money, much less lent it to them putting them further in debt, even at no interest. Looks what's happening right now as an indicator of things to come?

And the stimulus package? Do you think the government will be able to foster trust in "the system" by the time the stimulus "takes effect"? Things will be much worse by that time.

I'm not saying this means deflation, but IMO it certainly deflates iTulip's contention that the deflationistas are wrong on this point.

If people think that money will become worthless through inflation (when they learn what that means), they might spend it . . . but probably more for survival items than for cars, computers and TVs . . . and to pay down debt.

Sorry, raja. Still don't get your point. Are you saying that goods and commodity prices can't rise while demand is falling? Is that the deflationists' point that you say is "right"?

Kurt Horner
01-29-09, 02:15 PM
Mish's "Deflation All The Time Theory" sees deflation even when inflation is rampant I don't think Mish predicted deflation repeatedly so much as he has consistently said that it is possible in our economy. Now it looks like such a thing is actually occurring.

The market wants to purge all the excess credit (i.e. deflate) but monetary authorities have always acted to prevent that. It's not unreasonable to posit circumstances where monetary authorities can't act fast enough to offset deleveraging and deflation results.

As it stands right now it is very difficult to gauge whether the flood of new money will ultimately offset the disappearing credit. But right now, disappearing credit is clearly winning the fight despite stimulus that is at least two orders of magnitude larger than in any previous downturn.

bart
01-29-09, 02:25 PM
I don't think Mish predicted deflation repeatedly so much as he has consistently said that it is possible in our economy. Now it looks like such a thing is actually occurring.



If you read his older comments on his forum on Silicon Investor, which far predates his blog, I think you will likely be surprised.

Masher
01-29-09, 02:27 PM
I don't think Mish predicted deflation repeatedly so much as he has consistently said that it is possible in our economy. Now it looks like such a thing is actually occurring.

The market wants to purge all the excess credit (i.e. deflate) but monetary authorities have always acted to prevent that. It's not unreasonable to posit circumstances where monetary authorities can't act fast enough to offset deleveraging and deflation results.

As it stands right now it is very difficult to gauge whether the flood of new money will ultimately offset the disappearing credit. But right now, disappearing credit is clearly winning the fight despite stimulus that is at least two orders of magnitude larger than in any previous downturn.

But Ka-Poom Theory accounts for both disinflation and inflation. iTulip looks at the financial system, markets, and economy as interacting processes, undergoing constant change, and can't tell assets from commodities. Mish looks at the thing as a giant, undifferentiated mass, like a train rumbling toward a knocked out bridge over a ravine. In the train goes, down it goes, and he's right!

Credit contraction and asset price deflation are bigger and moving at a faster rate than government credit and money inflation now, resuting in the disinflation that iTulip has talked about. But i this was deflation as in the USA in the 1930s or even Japan in the 1990s, in dollar terms gold will not be at $880, silver at $11, platinum at $969, oil at $40, but at $300, $4, $400, and $15 or $20. To call this deflation is to misunderstand what's really going on. It's a critical error.

Spartacus
01-29-09, 03:47 PM
Sorry, raja. Still don't get your point. Are you saying that goods and commodity prices can't rise while demand is falling? Is that the deflationists' point that you say is "right"?

FRED, I read Raja to mean "unemployed people are not going to borrow more"

and maybe

"fearful employed people are not going to borrow more"

which may leave scant numbers to take on new credit

My answer is that yes, even with mass unemployment, there still are lots of people with good credit.

AND ... there seem to be no brakes on government.

Raja, you're making the same appeal (but less hysterical, less histrionic) that some have been making for a long time - a purely emotional, hysterically stated

"that just CANNOT BE"

I can calmly get your point, but once you strip out the over the top rhetoric you can see that there is another side - on on that other side is the fact that this has never happened since fiat money took over:

mild inflation --> sustained, self-reinforcing deflation --> hyperinflation

what has happened repeatedly:

steady state ---> inflation ---> high inflation --->(rarely if ever) sustained, self-reinforcing deflation

Chris Coles
01-29-09, 04:33 PM
If the system is predicting deflation and the reality becomes inflation then, as the change occurs and inflation starts they will be completely blindsided and will refuse to recognise the symptoms. Classic Mandarin mindset will overcome their perceptions. The more I have listened to the debate the more I have come to believe that regardless of what does happen, the system will be unable to respond. That it will lock up solid.

We often see this in a science fiction movie where the computer is asked an impossible question and because it tries to answer but cannot, it blows up. I suspect we are about to see the same effect, but this time for real. Faced with the unacceptable impossibility that they were after all wrong, they will not be able to change direction.

Kurt Horner
01-29-09, 04:38 PM
But Ka-Poom Theory accounts for both disinflation and inflation.

Right, and it does so by assuming that the contraction/re-inflation cycle will continue much as it has in the past. But there should be a breaking point. Since the re-inflation portion of these cycles prevents full liquidation of past malinvestment, there would be a cumulative build up of misallocated resources. Eventually, you'll hit a wall at which point the only alternatives are depression or hyperinflation.

If we have hit that wall, and we might have, then it all comes down to which choice (depression or hyperinflation) benefits the dominant portion of the power elite. Loss of dollar hegemony does not benefit the elite and since the state will protect their assets ("too big to fail") the institutional pressure is decisively on the side of depression.

(Caveat: if we see a lot of nationalization, then this institutional pressure might reverse. But as of right now, hyperinflation has no real constituency.)



Credit contraction and asset price deflation are bigger and moving at a faster rate than government credit and money inflation now, resuting in the disinflation that iTulip has talked about. But i this was deflation as in the USA in the 1930s or even Japan in the 1990s, in dollar terms gold will not be at $880, silver at $11, platinum at $969, oil at $40, but at $300, $4, $400, and $15 or $20. To call this deflation is to misunderstand what's really going on. It's a critical error.

CPI has turned negative, and all of the things you cite are down from their peaks -- oil and platinum considerably so. Prices didn't immediately hurtle downward in the Great Depression either. Regardless, we agree that we're in what iTulip calls the "Ka" phase. The question is whether or not there will be much of a "Poom."

I'm not really sure either way, but I'm increasingly leaning toward the idea that this cycle is the last one and the breaking point has been reached.

FRED
01-29-09, 04:52 PM
Right, and it does so by assuming that the contraction/re-inflation cycle will continue much as it has in the past. But there should be a breaking point. Since the re-inflation portion of these cycles prevents full liquidation of past malinvestment, there would be a cumulative build up of misallocated resources. Eventually, you'll hit a wall at which point the only alternatives are depression or hyperinflation.

If we have hit that wall, and we might have, then it all comes down to which choice (depression or hyperinflation) benefits the dominant portion of the power elite. Loss of dollar hegemony does not benefit the elite and since the state will protect their assets ("too big to fail") the institutional pressure is decisively on the side of depression.

(Caveat: if we see a lot of nationalization, then this institutional pressure might reverse. But as of right now, hyperinflation has no real constituency.)




CPI has turned negative, and all of the things you cite are down from their peaks -- oil and platinum considerably so. Prices didn't immediately hurtle downward in the Great Depression either. Regardless, we agree that we're in what iTulip calls the "Ka" phase. The question is whether or not there will be much of a "Poom."

I'm not really sure either way, but I'm increasingly leaning toward the idea that this cycle is the last one and the breaking point has been reached.

Ka-Poom Theory is starting to be followed carefully on many sites around the world. For example, this analysis Deflation, Reflation and Our Oil Future (http://www.aspousa.org/index.php/2009/01/deflation-reflation-and-our-oil-future/):


http://peakwatch.typepad.com/.a/6a00d83452403c69e2010536c8e144970c-pi


Figure 2 — Ka-Poom Theory from Eric Janszen (itulip.com@2006).
Annotated to reflect the current recession (in gray). Note that the start of
the current downturn (December, 2007) was predicted in 2006 following
the reflation that began in 2003 after the collapse of the stock market
(Tech) bubble


Note that the period of the "Ka" disinflation begins toward the end of 2008. Mind you, this chart was created in March 2006. Note also that the period of disinflation lasts well into 2010.

That's how long we think the political and economic wheels churn and grind before the current monetary regime gives out.

Ka-Poom Theory says a brief period of actual deflation is possible, as occurred in 2001 and is occurring now.

See, it's not enough to say what is going to happen, one also has to say why and, just as importantly when, and years ahead of time, else it's not an economic forecast, it's a statement of current or near current economic conditions, weather forecast by a weatherman looking out the window to tell you if it's raining.

bart
01-29-09, 04:59 PM
Loss of dollar hegemony does not benefit the elite...

Mere assertion.



CPI has turned negative...

Only if you believe both that CPI is 100% correct and not understated/manipulated, and that you do not distinguish between goods and asset inflation.

we_are_toast
01-29-09, 05:23 PM
Eat This! Deflationistas!


Buffalo's football team won't have a place in this year's Super Bowl (http://topics.forbes.com/Super%20Bowl) hoopla, but don't worry, its chicken wings will.

Amid unnerving media reports that spread from here to New York City (http://topics.forbes.com/New%20York%20City) and even Seattle about a potential shortage of the Buffalo-born appetizer heading into the big game, authorities say yes, production is down and yes, prices are up.

"But there's plenty of wings," assured Richard Lobb, spokesman for the National Chicken Council in Washington (http://topics.forbes.com/washington).

For those scoring at home, that'll mean about 1 billion wings scarfed down over the Super Bowl weekend.

In the last week or so, some fretted that the spicy snack would be scarce for a number of reasons: the highest wholesale and retail prices in recent memory; an industrywide, economy-driven drop in production of 5 to 6 percent; a bankruptcy filing from major Texas producer Pilgrim's Pride<orgid idsrc="nyse" value="PPC"></orgid> (nyse: PPC (http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=PPC) - news (http://search.forbes.com/search/CompanyNewsSearch?ticker=PPC) - people (http://people.forbes.com/search?ticker=PPC)), though it remains in business; and a push to sell wings by restaurant chains (http://topics.forbes.com/restaurant%20chains) like Pizza Hut and KFC. Taken together, connoisseurs worried that demand would outstrip supply.

And chicken wings were indeed missing for a day from the kitchen of one Niagara Falls restaurateur, but that was by design. Owner Sam Musolino refused to serve wings at Sammy's Pizzeria Monday to protest the annual price increases that arrive every year just in time for the big football weekend.

"They're basically just taking advantage of the pizzerias," said Musolino, who said he was paying $46 per 40-pound box of wings before the price jumped to $78 for the same case.

Lobb said the price is up because feed prices have gone through the roof and chicken producers have had to cut production as consumers have cut spending at casual dining restaurants that favor chicken dishes. That slump recently led to a glut of chicken on the market.

Now that supply is smaller and prices are up, Musolino said he can't pass along the temporary spike to customers - not that they'd pay anyway. "Everyone's so tapped out these days, there's no way you can raise the prices."

It's no trivial thing in this city that gave the world Buffalo wings. Anchor Bar owner Teressa Bellissimo first deep fried the wings and dunked them in hot sauce on a Friday night in 1964 when her son Dominic's hungry friends dropped in while he was tending bar. Until then, the wings were usually used for the stock pot.

Wholesale prices for fresh wings are up to $1.51 a pound this week, compared to $1.24 last year. But as of Jan. 1, the poultry industry had 38.3 million pounds of chicken wings on hand, down slightly from about 40 million pounds a year earlier, according to the U.S. Department of Agriculture.

"It's America's number one appetizer," said Drew Cerza, founder of Buffalo's annual chicken wing festival, who, incidentally, won't be frying up any wings on Sunday.

"It's my day off," he said.

http://www.forbes.com/feeds/ap/2009/01/29/ap5983788.html
;)

zoog
01-29-09, 07:16 PM
One thing I learned pretty early on after I started reading iTulip was to broaden my time horizon considerably. Despite myth of the slow crash (http://www.itulip.com/forums/showthread.php?p=15103#post15103), the various stages of this economic upheaval can take a long time to play out. Or they can change rapidly, it's hard to know. The suddenness surprises people, but the slowness outlasts their attention span. Our entire culture, at least here in America, has trained us to focus on the here and now... 15-second commercials, half-hour tv shows, yesterday's news is old news and what happened today is a total surprise. Is the stock market up today, things are good. Is it down today, things are bad. It really takes a concerted effort and a strong will to look beyond the short term, and the medium term, and even what most of the financial press, analysts, and economists would consider long term, to see what is eventually coming. And then prepare yourself as best you can... and wait. And wait.

raja
01-30-09, 01:24 AM
Sorry, raja. Still don't get your point. Are you saying that goods and commodity prices can't rise while demand is falling? Is that the deflationists' point that you say is "right"?
EJ said there are two components to the deflationistas' position, and that they are both wrong.

I'm saying that the second one may not be wrong.
EJ said, "Once past this first part of the deflationista's argument, the next is the "you take a horse to water but can't make him drink" argument, that the Fed can create all the money in the world but it can't make households and businesses spend it."

I'm suggesting that may be correct. People may not want to spend due to fear, as they see around them people losing jobs and stores closing. I saw a taste of this fear firsthand when my wife and her friend were shocked to find that three of the stores that had planned to shop in this past weekend had closed down.

The charts Fred posted in response to my initial post show past behavior, so I believe they do not negate my point, which refers to future behavior in respone to the deepening crisis.

spartacus did get my point . . . but he disagrees with it. His reasoning is: "even with mass unemployment, there still are lots of people with good credit. AND ... there seem to be no brakes on government."

My response is that someone with good credit may not take on more credit if they fear job loss . . . and no brakes on government only addresses the consumer credit availability side, not whether the credit offered will be used.

If I understand correctly, spartacus also suggests that this type of deflationary scenario has "never happened since fiat money took over." My response would be to point out that in this country we have never had 20% unemployment and 40% of stores closing under a fiat money regime.

Fred's missing my point -- which I believe was clearly stated -- suggests to me that there is a lot of momentum in his/her(?) thinking process on this subject, and perhaps the deflationistas' 2nd position deserves a closer analysis.

Spartacus
01-30-09, 02:04 AM
Your points are well taken. I don't claim that long term deflation is absolutely impossible, I don't think EJ does either. We do, however, have Bernanke's playbook.

At some point you just have to take a side. You could choose Mish's bombastic reasoning or EJ's less bombastic reasoning (apparently perceived by some as wishy-washy).

I've come down on the side I have because we have that playbook and are not tied an ideology saying
"the FED can do nothing",
"I'm an Austrian", or
"Rothard RUL3Z!!!, K3yn3s dr00lz!!! ".
(trying to be funny, not facetious)


My response is that someone with good credit may not take on more credit if they fear job loss . . . and no brakes on government only addresses the consumer credit availability side, not whether the credit offered will be used.

"no brakes on government" means several things
1. government can spend as much as it wants
2. they can set the stage to where there is no risk to banks writing loans
3. they can set the stage (maybe with new forms of insurance) to where there is little or no risk to people with good credit taking out loans.

Then fear don't enter into it.


If I understand correctly, spartacus also suggests that this type of deflationary scenario has "never happened since fiat money took over." My response would be to point out that in this country we have never had 20% unemployment and 40% of stores closing under a fiat money regime.

It's a good point and we don't know what will happen.
We only what Bernanke has promised to do try to fix the problem.


Fred's missing my point -- which I believe was clearly stated -- suggests to me that there is a lot of momentum in his/her(?) thinking process on this subject, and perhaps the deflationistas' 2nd position deserves a closer analysis.

Answering the same question 100 times and keeping gross photoshop'd porn off the site can be tiring, and may lead to reading something new with many of the same words as older posts as another one of those older posts.

Sharky
01-30-09, 03:33 AM
Although I'm in the iTulip camp with regard to Ka-Poom, there is another argument for hyperinflation that wasn't mentioned in the OP:

Rather than being completely driven by the creation of new money and credit, another scenario starts with overseas investors losing faith in the dollar. As a result, they look for a good way to exchange their dollar holdings for other assets. The largest supply of dollar-denominated assets is in the US, so the dollars come flooding home. When they arrive, asset prices are driven up, and the value of the dollar declines. At some point, the process becomes self-reinforcing: rising asset prices and a declining dollar encourages the selling of dollars and the purchase of assets; the velocity of money will increase.

What's different about this scenario is that the tools the Fed has available to it will do relatively little to slow it down, because it's not credit-driven.

FRED
01-30-09, 12:24 PM
Although I'm in the iTulip camp with regard to Ka-Poom, there is another argument for hyperinflation that wasn't mentioned in the OP:

Rather than being completely driven by the creation of new money and credit, another scenario starts with overseas investors losing faith in the dollar. As a result, they look for a good way to exchange their dollar holdings for other assets. The largest supply of dollar-denominated assets is in the US, so the dollars come flooding home. When they arrive, asset prices are driven up, and the value of the dollar declines. At some point, the process becomes self-reinforcing: rising asset prices and a declining dollar encourages the selling of dollars and the purchase of assets; the velocity of money will increase.

What's different about this scenario is that the tools the Fed has available to it will do relatively little to slow it down, because it's not credit-driven.

That is correct. That is part of the process. Please see the now frequently copied Ka-Poom Theory circa 1999 (http://www.itulip.com/kapoomtheory.htm).

Kurt Horner
01-30-09, 12:35 PM
Note that the period of the "Ka" disinflation begins toward the end of 2008. Mind you, this chart was created in March 2006.

And it's already inaccurate. Even using Shadowstats CPI, we never even got close to the 2008 peak CPI of 14% shown on this chart (Shadowstats gives 9%). Your timing is right, but the values are off.


Note also that the period of disinflation lasts well into 2010.

Meaning that nothing short of obvious deflation will resolve this question before then, since the deflation types are predicting a similar time frame for the market bottom.

So, I guess the question is, at what point is Ka-Poom theory disproven? A generous benchmark would be if Shadowstats shows negative CPI for a six-month period then deflation becomes hard to dispute. (At present, they show 3.5% year-over-year but the rate is dropping like a stone.)


Ka-Poom Theory says a brief period of actual deflation is possible, as occurred in 2001 and is occurring now.

Is six months long enough to no longer be considered a "brief" deflation? Or should we use a peak deflation value (i.e. CPI below -5%)?

This is important, since if you wish to have a predictive theory, then the theory should also be falsifiable.

Chris Coles
01-30-09, 12:50 PM
If the system is predicting deflation and the reality becomes inflation then, as the change occurs and inflation starts they will be completely blindsided and will refuse to recognise the symptoms. Classic Mandarin mindset will overcome their perceptions. The more I have listened to the debate the more I have come to believe that regardless of what does happen, the system will be unable to respond. That it will lock up solid.

We often see this in a science fiction movie where the computer is asked an impossible question and because it tries to answer but cannot, it blows up. I suspect we are about to see the same effect, but this time for real. Faced with the unacceptable impossibility that they were after all wrong, they will not be able to change direction.


A good example has just turned up courtesy of Huffington Post

The widespread contrition permeating Davos is matched by an unnerving feeling of paralysis. The people here -- and we are talking about some of the most influential people on the planet -- seem confused, at a loss about how to attack the financial crisis. No one seems to think that the steps being taken are sufficient. It's as if we are watching things unravel -- how many times, for example, are we gong to hear that layoffs have exceeded expectations? -- but are powerless to stop the unraveling.

http://www.huffingtonpost.com/arianna-huffington/davos-notes-contrition-pa_b_162290.html

bart
01-30-09, 01:04 PM
And it's already inaccurate. Even using Shadowstats CPI, we never even got close to the 2008 peak CPI of 14% shown on this chart (Shadowstats gives 9%). Your timing is right, but the values are off.


You're inaccurate, and also seem to like cherry picking... and are completely ignoring that the full SGS CPI peaked at around 13.6% in 2008.

If you don't care for Ka-Poom theory and apparently have so much attention on disproving it, why are you even here?

FRED
01-30-09, 01:32 PM
You're inaccurate, and also seem to like cherry picking... and are completely ignoring that the full SGS CPI peaked at around 13.6% in 2008.

If you don't care for Ka-Poom theory and apparently have so much attention on disproving it, why are you even here?

Between managing the 100+ applicants to join iTulip every day and filtering out spammers, at this rate we're going to have to hire a full time troll chaser.

bart
01-30-09, 01:45 PM
Between managing the 100+ applicants to join iTulip every day and filtering out spammers, at this rate we're going to have to hire a full time troll chaser.

Maybe you could start a volunteer official iTulip troll chaser group... :eek: :rolleyes: ;)

They sure are coming out of the woodwork, and its a sure indicator that iTulip's impact is growing greatly, and its approach, accuracy & relative sanity is getting the attention it deserves.
Fundamentals like a class act are always a winner.

Spartacus
01-30-09, 02:12 PM
if I understand correctly the chart is NOT the theory. It's not even the direct prediction of the theory - the chart is at 2 arms lengths from the theory.

The theory is some pragmatic combination of the theories and observations of Hudson, Mayer, Warburton, Galbraith, Keen, Bernanke and others.

the FED and political actions are the direct prediction.

The chart is, again, twice removed from the theory.

Spartacus
01-30-09, 02:29 PM
Between managing the 100+ applicants to join iTulip every day and filtering out spammers, at this rate we're going to have to hire a full time troll chaser.

Get some slave labour (sometimes called "interns", and other times "grad students")

(speaking from personal knowledge, having been one)

FRED
01-30-09, 02:46 PM
if I understand correctly the chart is NOT the theory. It's not even the direct prediction of the theory - the chart is at 2 arms lengths from the theory.

The theory is some pragmatic combination of the theories and observations of Hudson, Mayer, Warburton, Galbraith, Keen, Bernanke and others.

the FED and political actions are the direct prediction.

The chart is, again, twice removed from the theory.

Ka-Poom Theory (http://www.itulip.com/kapoomtheory.htm), the theory behind the chart, predates Hudson, Keen, and Bernanke, by many years, while Warburton and Mayer were inputs, as were Garret Garrett and a hundred others.

The chart expresses likely changes in inflation and interest rates if the theory holds true. Note that the original chart from Nov. 1999 was wrong: we did not anticipate the securitized debt market and the various bubbles it spawned, and stated that on our About page when we re-opened in March 2006. The second chart is a phase shift of the first, published in April 2006. Barring the development of a new bubble, which seems highly unlikely, no further phase shifts will be needed and the chart stands as is.

The primary value of such a theory is to compare actual events against the model. The variances from the model are more instructive than the agreements.

Contemptuous
01-30-09, 02:59 PM
Bart - with respect, I can't say I agree with this approach as were everyone to adopt and practice this viewpoint (those who disagree are "trolls") this community would rapidly "evolve" towards ever greater homogeneity of thinking. I notice Fred does not qualify your assertion, indicating he'd also like to see less disagreement or challenge to "the thesis". I greatly appreciate iTulip but the day you guys begin to tighten this intolerance of "trolls" to the point you are booting posters such as Kurt above for the altogether pointed and rational question he asked, I'll just wander off with them in sympathy. Metalman's constant barking in response to such "deviant" opinions represents the syndrom run amok. Don't like "all think alike" clubs. And your and Fred's definitions of "trolls" are acutely vulnerable to an invisible threshold question: when do such objections merely become a circling of the wagons?


You're inaccurate, and also seem to like cherry picking... and are completely ignoring that the full SGS CPI peaked at around 13.6% in 2008.

If you don't care for Ka-Poom theory and apparently have so much attention on disproving it, why are you even here?

Kurt Horner
01-30-09, 03:22 PM
You're inaccurate, and also seem to like cherry picking... and are completely ignoring that the full SGS CPI peaked at around 13.6% in 2008.

Oops, you're right. I read the "pre-Clinton CPI" from the main page, rather than the SGS CPI from their charts page. Fair enough, the theory could still hold -- and I should point out that I never said it couldn't still hold, just that it might not.


If you don't care for Ka-Poom theory and apparently have so much attention on disproving it, why are you even here?As you can see above, I can be reasonable. I think Ka-Poom makes plenty of sense, right up until the point where it the credit system breaks entirely. It's an open question whether another cycle can be initiated, and I think its worthwhile to ask at what point the theory will be falsified. Otherwise you're just being dogmatic.

bart
01-30-09, 03:45 PM
Bart - with respect, I can't say I agree with this approach as were everyone to adopt and practice this viewpoint (those who disagree are "trolls") this community would rapidly "evolve" towards ever greater homogeneity of thinking. I notice Fred does not qualify your assertion, indicating he'd also like to see less disagreement or challenge to "the thesis". I greatly appreciate iTulip but the day you guys begin to tighten this intolerance of "trolls" to the point you are booting posters such as Kurt above for the altogether pointed and rational question he asked, I'll just wander off with them in sympathy. Metalman's constant barking in response to such "deviant" opinions represents the syndrom run amok. Don't like "all think alike" clubs. And your and Fred's definitions of "trolls" are acutely vulnerable to an invisible threshold question: when do such objections merely become a circling of the wagons?


Opinions vary Lukester, but when someone starts posting with partial data and gets their facts wrong and merely makes assertions, then they deserve to be challenged at the very least.

Trolls do exist, whether you admit to it or take it into account or not. Whether that poster is one or not remains to be determined in my opinion, but I will always challenge incorrect facts or shoddy thinking or assertions or logical fallacies or similar when I see them.

And excessively emotional and "high horse" comments like your "I'll just wander off with them in sympathy" don't work in your favor.

metalman
01-30-09, 03:46 PM
Oops, you're right. I read the "pre-Clinton CPI" from the main page, rather than the SGS CPI from their charts page. Fair enough, the theory could still hold -- and I should point out that I never said it couldn't still hold, just that it might not.

As you can see above, I can be reasonable. I think Ka-Poom makes plenty of sense, right up until the point where it the credit system breaks entirely. It's an open question whether another cycle can be initiated, and I think its worthwhile to ask at what point the theory will be falsified. Otherwise you're just being dogmatic.

'all models are wrong, but some are useful' is the credo here. ka-poom has been very useful for ten years... kept me in gold, not trading it. check it...

http://www.kitco.com/LFgif/au00-pres.gif

you don't need a credit system to have mega inflation. eg. argentina... virtually no credit in the economy and double digit inflation. ka-poom theory accounts for that, too... a declining currency from repatriated dollars fuels the inflation.

bart
01-30-09, 03:56 PM
Oops, you're right. I read the "pre-Clinton CPI" from the main page, rather than the SGS CPI from their charts page. Fair enough, the theory could still hold -- and I should point out that I never said it couldn't still hold, just that it might not.

As you can see above, I can be reasonable. I think Ka-Poom makes plenty of sense, right up until the point where it the credit system breaks entirely. It's an open question whether another cycle can be initiated, and I think its worthwhile to ask at what point the theory will be falsified. Otherwise you're just being dogmatic.

Fair enough - mistakes do happen.

I have no problem with asking about a theory or whatever, or talking about it being falsifiable but Ka-Poom in my book is not about calling turns perfectly, but rather about a broad framework within which to judge events. The Ka-Poom chart has been noted on multiple occasions as not being intended for timing even though its accuracy has been pretty decent.

Ka-Poom also aligns well (or vice versa) with my own original work on a hard vs. paper asset cycle which is basically inflation driven, and goes back over 200 years. You'll notice that the down periods during a hard asset cyle last longer than a "brief" period of deflation and I submit that the Ka period also includes disinflation or stagflation if you prefer.

http://www.nowandfutures.com/images/dow_gold_oil_crb1900-current.png

Contemptuous
01-30-09, 04:44 PM
Bart - iTulip does not buy into the "cycles" idea to the best of my understanding. "Cycles" are suspiciously akin to "waves" and as far as I can grasp, that is a thoroughly discredited thesis regarding any fruitful observation of asset markets epiphenomena at iTulip. Not to mince terms, "Cyclical Predictability" is a bad word, here. iTulip in recent weeks has quite categorically stated that an intelligible approach to understanding market movements can only derive from the vantagepoint of marketplace fundamentals and reasonably traditional macro-economics.

Have you ever squared your "market cyclicality" thesis away with iTulip's editorial view, or does it remain an uncomfortable area of divergent viewpoints? In case my comment is read as ambivalent, I for one commend your work and embrace that cyclicality 100% (it's a very valuable insight!), and as it's 100% empirically derived and most eminently does display "cycles" which are suspiciously similar to "waves", I'm left wondering how exactly iTulip concludes that a technical scrutiny of reliably anticipated periodicity in the markets is a specious endeavor altogether. iTulip are infinitely subtle and modulated in most other analyses, but when it comes to "cycles" and "waves" a certain inflexibility creeps in.


Ka-Poom also aligns well (or vice versa) with my own original work on a hard vs. paper asset cycle which is basically inflation driven, and goes back over 200 years. You'll notice that the down periods during a hard asset cyle last longer than a "brief" period of deflation and I submit that the Ka period also includes disinflation or stagflation if you prefer.

http://www.nowandfutures.com/images/dow_gold_oil_crb1900-current.png

bart
01-30-09, 05:01 PM
Bart - iTulip does not buy into the "cycles" idea to the best of my understanding. "Cycles" are suspiciously akin to "waves" and as far as I can grasp, that is a thoroughly discredited thesis regarding any fruitful observation of asset markets epiphenomena at iTulip. Not to mince terms, "Cyclical Predictability" is a bad word, here.

I've never seen anything negative from EJ about things like the business cycle when combined with fundamentals etc..

He and iTulip are just not exactly big fans of the out there stuff like astrology/Bradley or Gann squares or TA etc. No big deal in my book - iTulip tolerates and allows a lot of variety even though the official position is that they're unworkable.
As you know, I seldom post out there stuff or even talk about short term trading or futures, and not only because its tricky, dangerous and not for everyone. Its also just plain manners. I seldom talk about religion when in a group of atheists either, as an example.

Contemptuous
01-30-09, 05:10 PM
Thanks for the clarification Bart. What do you think of the curiosity that there was a very large decline in the CRB in 1948-1949, one of the exceedingly few (2 or three declines only, in a century?) in the past century of a scale rivaling the current CRB decline, and that this occurrence was exactly 60 years ago? I don't have any irrevocable conviction about it, but it's certainly an interesting coincidence given that the "60 year commodity cycle" has been claimed and/or identified as the cornerstone of several different secular studies of market action? WD Gann for instance, whose winnings from the markets rivaled those of Jesse Livermore, insisted the 60 year cycle was one of the most critical insights into markets and cyclicality, and was the core reason he was able to be that successful a speculator? Is your view that iTulip discards this possibility too summarily? They have been quite unambiguous in discarding notions such as this, I believe. Of course one can make observations like this which in no way diminish the very great body of unique analysis iTulip provides. We are merely discussing one small area of their approach.


I've never seen anything negative from EJ about things like the business cycle when combined with fundamentals etc..

He and iTulip are just not exactly big fans of the out there stuff like astrology/Bradley or Gann squares or TA etc. No big deal in my book - iTulip tolerates and allows a lot of variety even though the official position is that they're unworkable.

Contemptuous
01-30-09, 05:16 PM
And excessively emotional and "high horse" comments like your "I'll just wander off with them in sympathy" don't work in your favor.

Seems like a pretty low key way to make that point to me. BTW, he wasn't telling you to go take a hike, it was the other way around, no? Otherwise I'm a huge fan of yours Bartos. You are one of the smartest (and politest) people on these pages [usually! :D ].

jtabeb
01-30-09, 05:21 PM
But Ka-Poom Theory accounts for both disinflation and inflation. iTulip looks at the financial system, markets, and economy as interacting processes, undergoing constant change, and can't tell assets from commodities. Mish looks at the thing as a giant, undifferentiated mass, like a train rumbling toward a knocked out bridge over a ravine. In the train goes, down it goes, and he's right!

Credit contraction and asset price deflation are bigger and moving at a faster rate than government credit and money inflation now, resuting in the disinflation that iTulip has talked about. But i this was deflation as in the USA in the 1930s or even Japan in the 1990s, in dollar terms gold will not be at $880, silver at $11, platinum at $969, oil at $40, but at $300, $4, $400, and $15 or $20. To call this deflation is to misunderstand what's really going on. It's a critical error.

The proper term is "coincident asset price deflation with simultaneous currency devaluation"

or more simply "asset deflation with currency inflation"

or even more simply "we're Fuc*ed"

Sharky
01-30-09, 08:30 PM
That is correct. That is part of the process. Please see the now frequently copied Ka-Poom Theory circa 1999 (http://www.itulip.com/kapoomtheory.htm).

I was responding to the OP, where that mechanism wasn't mentioned as a possible trigger for hyperinflation.

The Ka-Poom theory and follow-on reports such as Ka-Poom Theory Revisited (http://www.itulip.com/forums/showthread.php?t=610), suggest that the flow of repatriated dollars will stop in response to rising interest rates.

What I'm suggesting is that that might not be the case. If the integrity of the currency is put into serious doubt, perhaps by a currency crisis of some sort, the Fed could easily lose control over the situation, which would make "managed inflation" impossible.

Another factor that might lead to a loss of control is that the Fed might not be able to increase interest rates as they might need to. The impact of higher rates on the domestic economy (jobs, housing prices, etc) could easily be seen as politically unacceptable in comparison to the alternative.

Slimprofits
01-31-09, 04:13 AM
Jeff Rubin Chief Economist and Strategist for CIBC World Markets - Reflation - 01/23/09 (http://research.cibcwm.com/economic_public/download/sjan09.pdf)


Headline US CPI inflation will be running north of 4% in less than a year.

also included in the same report, Oil Prices: Another Spike Ahead:


Global demand snapped back at around a 3% pace after the two declines in oil consumption seen in the early 1980s. Even a 2-2½% bounceback would leave the world facing even tighter supply conditions than it did in 2007 when oil prices moved from $60 to $100 per barrel. Back then, demand was about 1.5 million barrels per day more than supply. This imbalance, not only led to a very rapid inventory drawdown, but also attracted speculative activity in oil markets. By our estimates, we expect to see an even larger imbalance, almost two million barrels per day, between recovering demand and shrinking supply as early as 2010.

raja
01-31-09, 10:47 PM
Your points are well taken. I don't claim that long term deflation is absolutely impossible, I don't think EJ does either. We do, however, have Bernanke's playbook.

At some point you just have to take a side. You could choose Mish's bombastic reasoning or EJ's less bombastic reasoning (apparently perceived by some as wishy-washy).

Spartacus,

I believe you misunderstand my intent.
I'm a novice on economic matters, so I'm reduced to evaluating those wiser and more experienced than I mostly on the logic of their arguments.
When EJ said that the deflationists were wrong about their contention that the government will be unable to get money into the economy, I thought about it. I concluded that if I was the "American consumer", and people all around me were losing jobs, and stores were closing left and right, would I borrow money, even at zero percent interest? The answer is no. I'd batten down the hatches, spending and borrowing as little as possible until the storm had passed.
As a result of this realization, it appeared to me that EJ might be wrong on this point, and the deflationists correct.
I was not generally criticizing EJs theories or championing Mish's.

Then, when Fred totally missed what I was saying, which I thought was very clear, the alarm bells went off.
To me, this suggested that Fred was so caught up in defending EJs position, that he was operating with blinders. That's what people do when they fervently get behind a cause -- they don't hear you. And, they make mistakes.


I've come down on the side I have because we have that playbook and are not tied an ideology saying
"the FED can do nothing",
"I'm an Austrian", or
"Rothard RUL3Z!!!, K3yn3s dr00lz!!! ".
(trying to be funny, not facetious)It's not about taking sides. EJ made an assertion . . . I pointed out what I thought was a flaw in that assertion . . . and I was hoping for some intelligent discussion about it. I have no ax to grind. I'm not a Mishite, a Misesian or an iTuliper -- I'm just here to learn how to save my financial skin.


"no brakes on government" means several things
1. government can spend as much as it wants
2. they can set the stage to where there is no risk to banks writing loans
3. they can set the stage (maybe with new forms of insurance) to where there is little or no risk to people with good credit taking out loans.

Then fear don't enter into it.Now you miss my point.
I'm saying that as the economy progressively tanks, people with good credit will fear to borrow money.
I agree that government spending would be an effective way to inject money . . . but only if people spend it to buy stuff, rather than pay down debt. The latter is what I think they will do.



Answering the same question 100 times and keeping gross photoshop'd porn off the site can be tiring, and may lead to reading something new with many of the same words as older posts as another one of those older posts.Perhaps. But when I restated my point, Fred never did respond.

bart
02-01-09, 12:21 AM
I'm a novice on economic matters, so I'm reduced to evaluating those wiser and more experienced than I mostly on the logic of their arguments.
When EJ said that the deflationists were wrong about their contention that the government will be unable to get money into the economy, I thought about it. I concluded that if I was the "American consumer", and people all around me were losing jobs, and stores were closing left and right, would I borrow money, even at zero percent interest? The answer is no. I'd batten down the hatches, spending and borrowing as little as possible until the storm had passed.
As a result of this realization, it appeared to me that EJ might be wrong on this point, and the deflationists correct.


I can't speak for EJ (although I will note that his stock short call in Dec 2007 is still active and has been very profitable) but for me the key is in the phrase "until the storm had passed".

It does not take consumer spending or borrowing to cause inflation in an economy or country. All it takes is creating more money than goods, as per one of the basic definitions of inflation.

While I believe that we're still in deflation (and Finster's FDI also shows it) per my BKX adjusted total money supply work etc., that does not mean it can't switch back to inflation virtually as fast as the deflation arrived. There are some signs of things reversing, and an inflationary currency "event" is also possible.

Jim Nickerson
02-01-09, 12:40 AM
http://bespokeinvest.typepad.com/bespoke/ (http://bespokeinvest.typepad.com/bespoke/) 1/30/09

Below is Bespoke's impression, emphasis mine to highlight.

GDP Price Index Enters the Deflation Zone (http://bespokeinvest.typepad.com/bespoke/2009/01/gdp-price-index-enters-the-deflation-zone.html)

While the markets have been focused on the better than expected GDP report for the fourth quarter, the GDP price index was potentially even more notable. While economists were looking for a quarter/quarter annualized increase of 0.4%, the actual level was a decline of 0.1%. This negative print is only the seventh time since the end of WWII (and the first time since 1954) that prices decrease based on this measure. For now at least, the Fed's view that "inflation pressures will remain subdued in coming quarters" appears to be right on target.


http://bespokeinvest.typepad.com/.a/6a00d8349edae969e201053703af70970c-400wi (http://bespokeinvest.typepad.com/.a/6a00d8349edae969e201053703af70970c-popup)

Jim Nickerson
02-01-09, 12:51 AM
Called to my attention by Master Shake on another thread this evening:

There is no way out of this mess without serious pain. Despite a deflationary bias today, most insiders see inflation and spiking interest rates as the risk going forward, probably early 2010 or sooner depending on how fast things start moving.


http://jessescrossroadscafe.blogspot.com/2009/01/notes-from-underground.html

Nobody I know knows when inflation shall take off, but it seems around here the expectation is yesterday or tomorrow. Elsewhere the opinions I read suggest it is a bit further down the pike.

Spartacus
02-01-09, 01:43 AM
It's not about taking sides.
correct. I used a shorthand. One argument or set of arguments, (IOW a "side") makes more sense than the other, you lean towards one set over the other.


EJ made an assertion . . .

Both stances are an assertion.

"If people are fearful they will borrow less."

"If borrowing is made attractive and safe enough, people will borrow. "


I pointed out what I thought was a flaw in that assertion . . . and I was hoping for some intelligent discussion about it. I have no ax to grind. I'm not a Mishite, a Misesian or an iTuliper -- I'm just here to learn how to save my financial skin.

Now you miss my point.
I'm saying that as the economy progressively tanks, people with good credit will fear to borrow money.

I don't think I missed it - point 3 was specifically on point.

"government sets the stage (perhaps with various forms of insurance) such that borrowers can borrow safely EVEN FEARING FOR THEIR JOBS during A RECESSION. If you can borrow without fear, Fear won't enter into it"

I don't see how I could get any more ON point.


Perhaps. But when I restated my point, Fred never did respond.

I see you're a premium member. Why aren't you asking in the "Ask EJ" forum?

metalman
02-01-09, 01:58 AM
Called to my attention by Master Shake on another thread this evening:


http://jessescrossroadscafe.blogspot.com/2009/01/notes-from-underground.html

Nobody I know knows when inflation shall take off, but it seems around here the expectation is yesterday or tomorrow. Elsewhere the opinions I read suggest it is a bit further down the pike.

looks like 2010 to 2011 to me...

http://www.itulip.com/images/KaPoom2006Q.gif

Contemptuous
02-01-09, 03:48 AM
Very interesting. Just exactly 60 years prior, on the nose.





http://bespokeinvest.typepad.com/.a/6a00d8349edae969e201053703af70970c-400wi (http://bespokeinvest.typepad.com/.a/6a00d8349edae969e201053703af70970c-popup)

xela
02-01-09, 04:54 AM
looks like 2010 to 2011 to me...

http://www.itulip.com/images/KaPoom2006Q.gif
The speed of all of this is "quite surprising".. certainly much faster then generally anticipated.
If credit keeps contracting then I would not bet on any dollar strenght, the Fed would have to make a u-turn on everything they said and done already.

Slimprofits
02-01-09, 05:14 AM
Nobody I know knows when inflation shall take off, but it seems around here the expectation is yesterday or tomorrow. Elsewhere the opinions I read suggest it is a bit further down the pike.

I've noticed the same thing Jim, but other than E.J., no one has talked about the U.S. possibly experiencing a currency event in 2009.

I happen to think we'll start to notice inflation during the summer months. My contrarian prediction is that Americans are not going to stay home en masse and not drive this summer. Give it another year of job losses before that happens.

bart
02-01-09, 12:24 PM
(http://bespokeinvest.typepad.com/bespoke/)

http://bespokeinvest.typepad.com/.a/6a00d8349edae969e201053703af70970c-400wi (http://bespokeinvest.typepad.com/.a/6a00d8349edae969e201053703af70970c-popup)


I urge some caution here Jim. That chart uses the GDP deflator which has diverged hugely from CPI since roughly the late '70s, and CPI is understated.

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

Jim Nickerson
02-01-09, 12:28 PM
The quotation is from the pdf below, which GRG55 put up yesterday or day before. Rosenburg may be wrong in all of his points, but I wouldn't bet on it.


David A. Rosenberg, Merrill Lynch 01/26/09




Risings savings rate will be incredibly deflationary


The process of a secular rise in the US personal savings rate and the dampening effect this will have on aggregate demand will be incredibly deflationary for some time. While fiscal stimulus will indeed cushion the blow, the mathematical reality is that the federal government must lift its share of the economy by 10 percentage points of GDP just to fully offset a 1 percentage point contraction in consumer spending. While there is growing concern over government bond supply to fund the record fiscal deficit, there is ample room on bank balance sheets for the new issuance, and the Fed has already hinted that it too will emerge as a buyer of Treasuries if market rates were to back up, as they have been for the past few weeks. Moreover, the expansion of the government debt must be viewed in the context of the contraction of private sector debt, and so on balance, the growth in total economy-wide credit has actually slowed to 6% (year-over-year) from nearly 9% a year ago.

Jim Nickerson
02-01-09, 12:42 PM
A "thank you" to jk for this link: http://www.nihoncassandra.blogspot.com:80/ Inflation(ists) vs. Deflation(ists) - Part II (http://nihoncassandra.blogspot.com/2009/01/inflation-vs-deflation-part-ii.html) 01/28/09


4. There are nuances. I am what [astute] reader-commentator (and unabashed inflationist) David Pearson terms "a deflationist overshooter". This is articulated or perhaps only implied in the original post, and reckons that: the weight of de-flation (de-leveraging, de-risking, precipitously de-clining core asset prices, de-capacitating financial system distress, de-employment shocks, secular de-consumption (savings) ratios, even demographics) trumps any triage, stitching or even bionic limb replacement conjured by central banks and Keynesian stimuli, by a large magnitude. And, this view conjectures, that by the time even the most interventionist authorities comprehend this, it will be too late for the inflationist "V" to ripen. AFTER that (two years?!? three?!?) when the majority of purge may be complete, and only then (year prior to re-election year 2012?) will the drastic measures be taken, which will be overkill and could very well/will lead to above trend inflation. Not hyperinflation. Above-trend inflation. It understands – as Jeremy Grantham suggested last weekend, that solutions will - like reducing greenhouse gases - likely require multiple types of adjustment including falls and write-downs in asset prices (particularly debt); debt-for-equity swaps, co[u]pled with some rise in nominal incomes and price indices. But like the deflationists, this view is predicated upon tinder being too wet to combust (again thanks David for the correct terminology), and authorities – in this new paradigm – having the impetus and fortitude to “do the right thing” in the heat of the moment, which, if recent history be the example is as likely or difficult as it is for one party living up to pre-coital promises in another universally-known heat-of-the-moment act.

Jim Nickerson
02-01-09, 01:19 PM
Chain Deflator Slows: Economic Distress Is Upon Us

by: Andrew Horowitz February 01, 2009 http://seekingalpha.com/article/117784-chain-deflator-slows-economic-distress-is-upon-us?source=article_lb_articles



Several pieces of important economic data were released last week including GDP, Chain Deflator, Chicago Purchasing Managers Index and The University of Michigan Consumer Sentiment. Traders have typically compared the expectations to the actual release while assessing the data, but it is important to note just how low these expectations actually are.

On Friday morning, investors seemed initially excited with the release of the Gross Domestic Product at -3.8% vs expectations of -5.5%. With expectations so low and constant revisions to the previous month’s data, it is impossible to rely or even react appropriately. The last time we have seen abysmal economic data such as this was way back in the late 1970’s and early 1980’s.

The real problem we see is that the Chain Deflator, which is widely recognized as a measure for inflation, has begun to show some worrisome signs of slowing. This is a sign that deflation is upon us. Deflation has been known to cause economic plagues such as increased unemployment, decreases in salaries and reduced company profits.

With that in mind, it is vital to keep a constant eye on deflation. The good news? The Federal Reserve has lowered rates to zero and can keep rates low for a while as there are many forces preventing inflation during the near-term. As the Fed is finding that it is literally impossible to get banks to lend money , there is little fear that this will produce inflation to offset the deflation anytime soon.

Jim Nickerson
02-01-09, 01:51 PM
The End of Gold 01/26/09 David Bailey http://seekingalpha.com/article/116404-the-end-of-gold



..
If people would only read a little further into their recently-dusted-off macroeconomics textbooks they'd find that while the government creates some money, the private system generally creates multiples of that amount. Well, it used to. Now what the private system does is destroy money as loans and credit lines are called in and cowardly business “leaders” throw layoff gasoline on the deflation fire. People are figuring out that the recent glut in bank reserves they see in the Fed's H.3 release (http://www.federalreserve.gov/releases/h3/Current/) is not an inflationary blast, but a probably insufficient bulwark against deflationary disaster. If Citibank (C (http://seekingalpha.com/symbol/c)) didn't tell you that loudly enough, I hope Bank of America (BAC (http://seekingalpha.com/symbol/bac)) did. If you didn't hear their message, just wait for the next debacle. The American capitalist system has become a money-destroying machine.

Once deflation sets in, there will be no profits to be found – anywhere. But as I write this and gold puts in the second spike of a double or triple top, the value proposition short gold becomes really too good to ignore. If gold can break convincingly out of the anti-bubble, fine, you stop out somewhere between here and north of $1000/oz. Pick your spot, but it's not a bad loss. If gold cannot break out of the commodities anti-bubble, you are in contrarian heaven. In that scenario, gold loses a minimum of $250/oz before it gets another sustained uptrend and the fundamentals remain bearish for the foreseeable future. I think this present spike in gold will prove about as reliable as the recent spike in the euro:

..

In my view, going long gold is just another manifestation of the Deflation Denial syndrome. I think the smart play – maybe the only play – is to be long deflation in this environment. If you can find a better deflation play than going short gold – make it.


David has a followup to the above here http://seekingalpha.com/article/117775-the-end-of-gold-part-two 02/01/09

snip



Does America now have a “can't do” attitude? When American business people – the most powerful economic actors in human history – think themselves powerless, there is a serious problem. Specifically, deflation. More specifically, about 90,000 layoffs at major companies announced just this week. Deflationary behavior has not only set in, it has been firmly embraced by American business (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqc_bpAZTgqE). Think of it this way: the financial stuff is the technical, but unemployment is the fundamental valuation metric when it comes to deflation. Our business leaders have already decided we are going to see massive unemployment. As for the American financial community – do I really even have to get into that? Those fraudsters aren’t even trying to do business. They are spending all their time trying to hide from the results of their misdeeds and to drag as much taxpayer money as possible (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avp6v1vqeQ2E) down into the deflationary sinkhole they have dug for us all.

Nobody makes much money in a deflation. It’s that simple and that grim. With a negative mentality firmly in control of the American economy, the only way you make a good profit is to find something to go short that deflation hasn’t hit yet - like gold.

Could gold see a second bubble? Sure. Would I bet on it? No.

What do you want from me? That’s just the way it is.


To me, unless gold starts retreating from its recent runup, the charts on gold look quite constructive now.

bart
02-01-09, 02:03 PM
From the history doesn't repeat but rhymes department:

http://www.nowandfutures.com/images/gold1966-1980and_now.png

Contemptuous
02-01-09, 11:07 PM
Removed. Frivolous comment.

strittmatter
02-13-09, 06:28 PM
He serious about the scotch?


Efforts to avoid a deflationary depression will probably produce the opposite -- a nasty bout of inflation, says John Williams of Shadow Government Statistics, who advises hoarding gold and even Scotch to barter. Alistair Barr reports. (Feb. 12)

<embed src="http://s.wsj.net/media/swf/main.swf" bgcolor="#FFFFFF" flashVars="videoGUID={46C4AF8C-4C1D-425E-9570-ADE365D5132C}&playerid=2000&plyMediaEnabled=1&configURL=http://wsj.vo.llnwd.net/o28/players/&autoStart=false” base="http://s.wsj.net/media/swf/" name="flashPlayer" width="512" height="363" seamlesstabbing="false" type="application/x-shockwave-flash" swLiveConnect="true" pluginspage="http://www.macromedia.com/shockwave/download/index.cgi?P1_Prod_Version=ShockwaveFlash"></embed>

metalman
02-13-09, 06:30 PM
maybe he should stick to drinking the scotch...

the link doesn't work.

<embed src="%3Ca%20href=" http:="" s.wsj.net="" media="" swf="" main.swf="" target="_blank">

bart
02-13-09, 06:50 PM
He serious about the scotch?


Efforts to avoid a deflationary depression will probably produce the opposite -- a nasty bout of inflation, says John Williams of Shadow Government Statistics, who advises hoarding gold and even Scotch to barter. Alistair Barr reports. (Feb. 12)


Yes, he's serious about the scotch and similar.

Here's an indirect link that works:
http://www.ritholtz.com/blog/2009/02/100-bills-as-toilet-tissue/

strittmatter
02-13-09, 06:53 PM
thanks bart....my linker must be busted, or I am.

Jay
02-13-09, 07:23 PM
Yes, he's serious about the scotch and similar.

Here's an indirect link that works:
http://www.ritholtz.com/blog/2009/02/100-bills-as-toilet-tissue/
Alright, I need to ask because I'm a scotch drinker and like the idea of a scotch thread: what would fellow single malt fans suggest for barter? A couple cases of various 15 year olds or would you load up on a few very pricey rare scotches?

I can't wait, my wife will love the "cases of scotch in the cellar" conversation.... tongue firmly in cheek. ;)

Edit: Awww, screw it, I know the answer already, all of the above of course!

Charles Mackay
02-13-09, 08:44 PM
From the history doesn't repeat but rhymes department:

http://www.nowandfutures.com/images/gold1966-1980and_now.png

Hi Bart, I enjoyed the Weimar charts that you put up on your site. What do you suppose accounted for those order of magnitude swings in gold? Rumors of stabilization?

bart
02-13-09, 09:22 PM
Hi Bart, I enjoyed the Weimar charts that you put up on your site. What do you suppose accounted for those order of magnitude swings in gold? Rumors of stabilization?


Thanks for the nudge. I've wanted to add a chart showing just gold & silver prices alone since I have the data, and this was a good excuse.
I updated my Weimar charts page too.



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



As you can see, the swings you saw reflected the changes & volatility in the cost of living index or the wholesale price index *much* more than they reflected gold & silver price changes.

Note also that the prices through mid 1923 are from data captures 4 months apart so the chart does not capture any of the volatility or corrections... probably a good thing since buy & hold was by far the best approach during Weimar.

Charles Mackay
02-13-09, 11:36 PM
Thanks for the nudge. I've wanted to add a chart showing just gold & silver prices alone since I have the data, and this was a good excuse.
I updated my Weimar charts page too.

As you can see, the swings you saw reflected the changes & volatility in the cost of living index or the wholesale price index *much* more than they reflected gold & silver price changes.

Note also that the prices through mid 1923 are from data captures 4 months apart so the chart does not capture any of the volatility or corrections... probably a good thing since buy & hold was by far the best approach during Weimar.

So, that move was 10 to the 12th power. EJ is looking for only a one order of magnitude move... from $250 to $2500. What about yourself?

In terms of purchasing power my yardstick has been 100 oz of gold for a median existing house and 1 oz of gold for the DJIA. But, in Weimar there are stories of houses selling for just a couple oz of gold in the worst part of the crisis.

Chris Coles
02-14-09, 04:05 AM
So, that move was 10 to the 12th power. EJ is looking for only a one order of magnitude move... from $250 to $2500. What about yourself?

In terms of purchasing power my yardstick has been 100 oz of gold for a median existing house and 1 oz of gold for the DJIA. But, in Weimar there are stories of houses selling for just a couple oz of gold in the worst part of the crisis.

I believe I have related this story before. I was once told of an Englishman that made his fortune by being asked to fly into Germany with a lot of Sterling stuffed into the nooks and cranny's of the aircraft. But his "friend" dropped dead between takeoff and landing and so he did it for himself and overnight became the proud owner of sufficient property to become a very wealthy individual.

The underlying truth is that when hyper inflation sets in, the instigators lose all sense of reality. We see that very clearly in Zimbabwe today. So at its height, the owners of property lose all sight of the true worth of property and only see the possibility of getting their hands on what to you will seem a small sum, but to them, because of the disparity, is a fortune.

My own family history has a similar story with the bequest of eight properties in Harrow High Street in 1939 all with long term leases and miserable rents. They sold them for insignificant sums. The mind boggles at the thought of the value today.

Charles Mackay
02-14-09, 09:35 AM
I believe I have related this story before. I was once told of an Englishman that made his fortune by being asked to fly into Germany with a lot of Sterling stuffed into the nooks and cranny's of the aircraft. But his "friend" dropped dead between takeoff and landing and so he did it for himself and overnight became the proud owner of sufficient property to become a very wealthy individual.

The underlying truth is that when hyper inflation sets in, the instigators lose all sense of reality. We see that very clearly in Zimbabwe today. So at its height, the owners of property lose all sight of the true worth of property and only see the possibility of getting their hands on what to you will seem a small sum, but to them, because of the disparity, is a fortune.

My own family history has a similar story with the bequest of eight properties in Harrow High Street in 1939 all with long term leases and miserable rents. They sold them for insignificant sums. The mind boggles at the thought of the value today.

Right, and not only do they lose sight of the true worth but also rents are usually controlled therefore causing a transfer of wealth to the tenant.

bart
02-14-09, 12:07 PM
So, that move was 10 to the 12th power. EJ is looking for only a one order of magnitude move... from $250 to $2500. What about yourself?

In terms of purchasing power my yardstick has been 100 oz of gold for a median existing house and 1 oz of gold for the DJIA. But, in Weimar there are stories of houses selling for just a couple oz of gold in the worst part of the crisis.


I've been on record since about 2005 for an eventual gold peak of at least $3200, based partially on Jim Sinclair's Fed custodials algorithm.

Here's the current picture, the green line representing his algorithm.

http://www.nowandfutures.com/images/gold_target_m1_custodials.png



As far as 100 oz. of gold for a median house, I believe it will be exceeded but will look to actual market behavior and prices more for my cues.
I doubt that we'll see houses available for a couple of ounces... but I also didn't think the Berlin Wall would come down in my lifetime either.

LargoWinch
02-14-09, 12:36 PM
I've been on record since about 2005 for an eventual gold peak of at least $3200, based partially on Jim Sinclair's Fed custodials algorithm.

Here's the current picture, the green line representing his algorithm.

http://www.nowandfutures.com/images/gold_target_m1_custodials.png



As far as 100 oz. of gold for a median house, I believe it will be exceeded but will look to actual market behavior and prices more for my cues.
I doubt that we'll see houses available for a couple of ounces... but I also didn't think the Berlin Wall would come down in my lifetime either.

Bart, thank you for this. This complement my Saturday morning coffee nicely. I also saved this graph in my "[master] bart" folder.


I took the liberty to browse nowandthefutures.com (http://www.nowandfutures.com/)for similar charts about crude oil, but could not find any for 2009. Would you happen to have the same for crude oil or a 2009 forecast for crude oil?

Lastly, I noticed that your forecast for the USD is quite bearish in H2 of 2009, hence I assume that your are probably bullish on commodities for H2/2009?

-W.

PS: I did find this chart, but I do not understanding as well as the one about gold above...

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

bart
02-14-09, 02:19 PM
Bart, thank you for this. This complement my Saturday morning coffee nicely. I also saved this graph in my "[master] bart" folder.

For what its worth, that chart is also on my "miscellaneous" page and updated weekly.



I took the liberty to browse nowandthefutures.com (http://www.nowandfutures.com/)for similar charts about crude oil, but could not find any for 2009. Would you happen to have the same for crude oil or a 2009 forecast for crude oil?

I've tried for years to come up with an algorithm that does a decent job of predicting oil prices, other than on the very long term, and have failed. My long term minimum target is $250-350 per barrel though, for what its worth.



Lastly, I noticed that your forecast for the USD is quite bearish in H2 of 2009, hence I assume that your are probably bullish on commodities for H2/2009?

-W.

In a word - yes.

And for others, this is probably the forecast/prediction chart to which your refer.

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





PS: I did find this chart, but I do not understanding as well as the one about gold above...

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


That chart is from my intervention page which I put together about 18 months ago, due to requests to show many of the behind the scenes and lesser known factors that can affect oil, gold, stock indexes etc... and yes, its also one of my infamous spaghetti charts.

It's also evidence, due to its failure to show any reasonable correlation between the oil price and any of the elements being charted, of my difficulties & failures in predicting oil prices.

LargoWinch
02-14-09, 04:24 PM
Thank you Bart for the comprehensive (and prompt!) response.

My maple syrup debt to you has just increased once again.

strittmatter
02-14-09, 05:50 PM
I've been on record since about 2005 for an eventual gold peak of at least $3200, based partially on Jim Sinclair's Fed custodials algorithm.

Here's the current picture, the green line representing his algorithm.

http://www.nowandfutures.com/images/gold_target_m1_custodials.png



As far as 100 oz. of gold for a median house, I believe it will be exceeded but will look to actual market behavior and prices more for my cues.
I doubt that we'll see houses available for a couple of ounces... but I also didn't think the Berlin Wall would come down in my lifetime either.

I have not known of or followed Jim Sinclair for very long, lately he seems to be extremely headstrong with his bullish gold outlook. He says he agree's with Alf Fields' predictions and he also points to Martin Armstrong's latest bullish sentiments, although Armstrong doesn't tout specific numbers, just refers to "an exponential rally going into 2015".

Mr. Sinclair strikes me as an interesting fellow, and one that has evidently had his finger on the pulse of the game for quite some time.

So I guess my question is, What are your thoughts on him?

Thanks.

bart
02-14-09, 06:29 PM
I have not known of or followed Jim Sinclair for very long, lately he seems to be extremely headstrong with his bullish gold outlook. He says he agree's with Alf Fields' predictions and he also points to Martin Armstrong's latest bullish sentiments, although Armstrong doesn't tout specific numbers, just refers to "an exponential rally going into 2015".

Mr. Sinclair strikes me as an interesting fellow, and one that has evidently had his finger on the pulse of the game for quite some time.

So I guess my question is, What are your thoughts on him?

Thanks.

The simplest answer is that I have a great deal of respect for him and have also learned a great deal from him. He's very much in my top 10, which of course includes EJ.

He has been around since the '70s and knows mining and gold and futures and behind the scenes issues etc. as well as anyone. About the only non positive things are that he's virtually always bullish (for as trader like me it can be costly paying too much attention to his shorter term views) and that he can be over the top or difficult to understand sometimes. I'm subject to that last item too.

strittmatter
02-14-09, 06:55 PM
I see.

Thanks.

Willette
02-20-09, 09:39 AM
O.O. - I agree with you: I think EJ got entangled in his terminology here.

"The political question is, in this scenario, which savers are losing? Remember, savers lose when debt is written off, either explicitly or via inflation. The answer is that in inflation, all savers lose. Politically, inflation is a tax on all savers to pay all creditors, but the creditors pay, too, by loss of purchasing power of debts collected. The political advantages of inflation in a debt deflation crisis are obvious: savers and creditors share the pain, and to accomplish it all the government has to do is continue to do what it is already doing, without changing course."
Savers of money and creditors are indeed almost the same thing, unless these savers are personally holding gold, silver or dead presidents. I would say that by hyperinflation debtors and creditors share the pain of a destroyed real economy where normal business activity becomes difficult to impossible.

Also, many debtors just do not realize that they are also creditors by virtue of holding dollar denominated promises of future government benefits like social security and medicare, etc. So while their Loan balances are inflating away, their retirement benefits are doing the same.

Because of the delay between money creation and price inflation, governments can continue to spend, while acting like they just don't understand what is happening and never saw it coming and have only the best motives of saving the world, but aren't really responsible.

The truly wealthy will be little affected because they already own the majority of the world's productive assets, which are unaffected by all this money jiggering. The nominal price may change, but who cares if you own it free and clear?

photoncounter
02-22-09, 01:02 AM
Thanks Bart !



There's both some incorrect or incomplete facts there and its also missing many other stat comparisons.

Monetary & fiscal stat comparisons, 1929 and now (http://www.itulip.com/forums/showthread.php?t=6856)

globaleconomicollaps
02-22-09, 05:18 PM
http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?_r=2&ref=business


Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.

metalman
02-22-09, 06:33 PM
http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?_r=2&ref=business


Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.

maybe i'm getting old and forgetful but until last week or so... wasn't the japanese model for fighting deflation the model of success?

jk
02-22-09, 06:47 PM
maybe i'm getting old and forgetful but until last week or so... wasn't the japanese model for fighting deflation the model of success?
i think a google search on "lost decade" will show that japan was NOT considered a model of success.

metalman
02-22-09, 07:04 PM
i think a google search on "lost decade" will show that japan was NOT considered a model of success.

yes it was. it was, after all, better than the usa 1930s or japan after the war.

no 25% unemployment. no beggars in the streets.

success!!!

the strategy for japan was to make sure that by the time the economy collapsed the population was too old to revolt.

vanvaley1
02-22-09, 08:18 PM
Yeah, difficult to be a revolutionary when ya forget how to release the brake on your wheelchair. But don't sell us ole timers short...we'll figure it out eventually.

Chomsky
02-22-09, 08:53 PM
yes it was. it was, after all, better than the usa 1930s or japan after the war.

no 25% unemployment. no beggars in the streets.

success!!!

the strategy for japan was to make sure that by the time the economy collapsed the population was too old to revolt.

I mean, you are absolutely right. Richard Koo, etc., how rosy it all looked before the global depression took hold. No external demand, no internal demand, no economy. Man are the Japanese f'd.

metalman
02-22-09, 10:37 PM
I mean, you are absolutely right. Richard Koo, etc., how rosy it all looked before the global depression took hold. No external demand, no internal demand, no economy. Man are the Japanese f'd.

SAYS JAPAN YEARNS FOR WORLD PEACE (http://query.nytimes.com/gst/abstract.html?res=9B04E5DE113EEE3ABC4A52DFB467838A 639EDE); Prince Tokugawa Proclaims Militarism of His Nation to Be a Thing of the Past. CITES FIRST TREATY WITH US Spirit of Sincere Amity It Breathed Still Cherished by Japanese People, He Asserts.

<!-- close toolsRight --> December 12, 1921, Monday
Page 2, 867 words
WASHINGTON, Dec. 11.--Declaring that Japanese "militarism" is a thing of the past, and praising the injection of American idealism into international affairs, Prince Iyegato Tokugawa of the ...

LargoWinch
02-23-09, 09:53 AM
The truly wealthy will be little affected because they already own the majority of the world's productive assets, which are unaffected by all this money jiggering. The nominal price may change, but who cares if you own it free and clear?

Willette, your statement is somewhat counter-intuitive to me. Let me explain:

Asset owners, whether they financed that asset or not, are the most affected by a decline in asset values (equities and RE got most affected lately, but art and collectibles also tanked).

The “poor” on the other hand who is renting and living paycheck to paycheck is a lot less (if at all) affected by a decline in assets ; unless he

a) loses his job
b) is ravaged by inflation (different topic)
c) had 401k in equities or other paper assets
d) is taxed as a result of this debacle

All of this has nothing to do directly to a decline in asset prices no?

Willette
02-23-09, 10:39 AM
My comment was not focusing just on asset price declines. The topic, and my quote have all to do with government induced inflation in response to credit (and asset price) collapse. First the ka, then the poom.

My thought is that the super-rich hold most of their wealth in tangible assets (farms, factories, real estate, businesses) rather than in fiat dollar denominated promises to pay. They are not likely to suffer any lack of food, clothing or shelter during the dislocations. The super-rich are known for their tendency to plan for the long term. Prices may go down and up, fiat currency may depreciate or become worthless. But after the crisis passes, the super-rich emerge still owning the same productive assets, and probably more that they were prepared to buy at the bottom. They were (typically) not forced to sell at the bottom since they are not highly leveraged.

Those of the middle and lower economic classes ARE subject to all four of your points a - d as a result of being whipsawed by the ka-poom and not having sufficient resources to ride it out in comfort. Decline of asset prices is only one phase of this process.

LargoWinch
02-24-09, 09:38 AM
yes it was. it was, after all, better than the usa 1930s or japan after the war.

no 25% unemployment. no beggars in the streets.

success!!!

the strategy for japan was to make sure that by the time the economy collapsed the population was too old to revolt.

Something bugs me about Japan.

How can any country maintains a 190% (or so) Debt to GDP ratio and not see its currency collapse? Rogers was (maybe still is) a big fan of the yen and does not like gold too much. What is going on here?

This is especially puzzling given that Japan population is expected to be around 90 million in 2050 down from 120 million or so now.

I understand the trade surplus but still...

c1ue
02-24-09, 10:50 AM
Largo,

Japan's been able to survive thus far because of a combination of 2 things:

1) debt is owed to itself. Japanese as individuals and as a society have (had) a very high savings rate. Almost all of their debt is owned by Japanese individuals and corporations - a big chunk is via the postal pension system.

Why does this matter? Because owing the debt to itself means Japan has been able to set its own interest rates even though it owes huge sums. Having a national interest rate of almost 0% means the Japanese government not having to pay much money out to support its existing debt burden.

It is the interest payments which normally start a negative cycle for governments, or at least make governments vulnerable to some other extraneous event.

2) The trade surplus: this is actually more indirect. Having a trade surplus means Japan can pay for imports using proceeds from exports. The debt owed to self is helpful only in the negative sense - because it doesn't consume foreign exchange used to pay interest.

The US avoids this problem by having debts denominated in its own currency; what Japan is doing is a non-reserve currency equivalent.

In contrast most other nations borrow money in foreign currencies then get a double whammy as both rising borrowing needs and lowering domestic incomes sink their domestic currency exchange rates - thus making both principal and interest payments even more difficult.

Japan's problem - then - is a severe demographic one, with a major economic one now as well. Normally a bout of currency appreciation such as Japan has experienced can be offset by printing of money. But too much printing means it is likely domestic interest rates will rise - as the system is already thoroughly stuffed with existing debt. These rising interest rates in turn will force much higher interest payments on debt which may force Japan to start borrowing abroad.

But if the currency situation isn't reversed, then the Japanese economy is going to have a significant reverse - as we're already seeing.

LargoWinch
02-24-09, 11:00 AM
Largo,

Japan's been able to survive thus far because of a combination of 2 things:

1) debt is owed to itself. Japanese as individuals and as a society have (had) a very high savings rate. Almost all of their debt is owned by Japanese individuals and corporations - a big chunk is via the postal pension system.

Why does this matter? Because owing the debt to itself means Japan has been able to set its own interest rates even though it owes huge sums. Having a national interest rate of almost 0% means the Japanese government not having to pay much money out to support its existing debt burden.


Thanks C1ue, that is very insightful.

That begs the question however, why are Japanese savers elect to "save" their hard-earned money elsewhere than domestically at 0%?

Are they not aware that markets are global and that ETFs are just a mouse click away? or are they simply so risk averse that they love their crispy Yen notes at the bank? Or perhaps they are simply happy with their savings gaining in purchasing power despite the 0% rate?

c1ue
02-24-09, 04:51 PM
Largo,

Up until fairly recently - Japanese as evidenced by the ones I personally know were very investment naive. For them the world consisted of Japan - anything outside of that was pretty much irrelevant and unknowable.

Stocks were bad - everyone has still strong memories of getting burned in the 1990s bubble.

Real Estate was bad - everyone still owns property with loans growing in proportion to property value.

Bonds - 0.5%.

Bank deposits: 0.2% - 1M yen yields something like 200 yen a month. Equal to a pack of cigarettes.

So why not just toss it all in the postal pension scheme with its convenient neighborhood office? (and ATM)

In the last 5 years, more and more Japanese were starting to mess with the carry trade abroad - the Mrs. Watanabe thing.

Well, that experiment is ending badly. As I noted in another thread - losses of 30%, 40% and more are not unusua - and that was before the yen collapsed to 89/$.

You can be pretty sure that those affected aren't going to try that again.

Fiat Currency
07-10-09, 10:47 AM
I thought this was interesting ...

http://www.docstoc.com/docs/8262850/Thunder-Road-Report---Inflation-Deflation-Debate

LargoWinch
07-10-09, 11:53 AM
I thought this was interesting ...

http://www.docstoc.com/docs/8262850/Thunder-Road-Report---Inflation-Deflation-Debate

We will have both [inflation / deflation] at the same time!? :confused:

And me who thought people were not confused enough as it is with "disinflation" and "asset price deflation".


Having said that, thanks for posting FC. Here is your article embedded:

<object id="_ds_8262850" name="_ds_8262850" width="670" height="550" type="application/x-shockwave-flash" data="http://viewer.docstoc.com/"><param name="FlashVars" value="doc_id=8262850&mem_id=990299&doc_type=pdf&fullscreen=0" /><param name="movie" value="http://viewer.docstoc.com/"/><param name="allowScriptAccess" value="always" /><param name="allowFullScreen" value="true" /></object><br /><font size="1"><a href="http://www.docstoc.com/docs/8262850/Thunder-Road-Report---Inflation-Deflation-Debate">Thunder Road Report - Inflation-Deflation Debate</a> - </font>

FRED
07-10-09, 08:59 PM
We will have both [inflation / deflation] at the same time!? :confused:

And me who thought people were not confused enough as it is with "disinflation" and "asset price deflation".


Having said that, thanks for posting FC. Here is your article embedded:

<object id="_ds_8262850" name="_ds_8262850" type="application/x-shockwave-flash" data="http://viewer.docstoc.com/" height="550" width="670">



</object>
Thunder Road Report - Inflation-Deflation Debate (http://www.docstoc.com/docs/8262850/Thunder-Road-Report---Inflation-Deflation-Debate) -

We plan to soon implement iTulip's model of Internet Knowedge Accumulation.


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


We'll explain more later, but the basic idea is to not allow iTulip to get cluttered up with junk economics ideas the way the Internet is.

For example, we learned years ago to distinguish between asset price inflation and deflation in the FIRE Economy and goods and services price inflation and deflation in the Producer/Consumer Economy because the former drives the latter, the former is more than ten times the size of the other in terms of aggregate payments, and each is managed according to separate central bank policy.


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


Any economic analysis that does not distinguish between asset price inflation and deflation in the FIRE Economy and goods and services price inflation and deflation in the Producer/Consumer Economy goes into our new forum called Junk Economics (http://www.itulip.com/forums/forumdisplay.php?f=75).

LargoWinch
07-10-09, 10:53 PM
Whoa. I must admit FRED, that is a lot to think about.

I had to read and re-read this.

...

I need to reflect more on this, but your "illustration" appears to indicate that Goods Prices matter little when inflation moved into asset prices such as Real Estate.

That is until...the system reset to "equilibrium"? :eek:

metalman
07-10-09, 11:30 PM
i see what you're doing here... testing it out. cool.

but... wow. that's a lot to lay on a guy.

jk
07-11-09, 09:51 AM
a few years ago contraryinvestor.com proposed that a key link between the 2 economies, causing the asset inflation in the fire economy to produce goods inflation in the p/c economy, was commodity prices. [that site did not use the "fire" vs. "p/c" language, but clearly referenced its hypothesis as asset inflation feeding into goods inflation.] what it said - translated into itulipese- was that the increased fire asset values led to increased consumption in the p/c economy, especially via heloc's and equity-out refi's. the increased goods consumption led to pressure on commodity prices and this led to goods price inflation. thus the fed was trapped, unable to keep pumping asset prices without causing goods inflation. i would add that fire market speculation/momentum players then pushed commodity prices farther and faster, thus amplifying the effect.

metalman
07-11-09, 07:25 PM
a few years ago contraryinvestor.com proposed that a key link between the 2 economies, causing the asset inflation in the fire economy to produce goods inflation in the p/c economy, was commodity prices. [that site did not use the "fire" vs. "p/c" language, but clearly referenced its hypothesis as asset inflation feeding into goods inflation.] what it said - translated into itulipese- was that the increased fire asset values led to increased consumption in the p/c economy, especially via heloc's and equity-out refi's. the increased goods consumption led to pressure on commodity prices and this led to goods price inflation. thus the fed was trapped, unable to keep pumping asset prices without causing goods inflation. i would add that fire market speculation/momentum players then pushed commodity prices farther and faster, thus amplifying the effect.

but... that's not the fire econ vs pc econ story tho, is it? the miracle of the fire econ is it creates asset inflation without p/c price inflation! too bad it doesn't work the other way... when the fire econ goes boof! it takes the p/c econ down with it.

Morelia
07-11-09, 10:18 PM
I had to read and re-read this.



For example, we learned years ago to distinguish between asset price inflation and deflation in the FIRE Economy and goods and services price inflation and deflation in the Producer/Consumer Economy because the former drives the latter, the former is more than ten times the size of the other in terms of aggregate payments, and each is managed according to separate central bank policy.


It's a run-on sentence. They can be difficult to comprehend, so don't feel obtuse.

centsless
07-12-09, 12:44 PM
It's a run-on sentence. They can be difficult to comprehend, so don't feel obtuse.

hello forum. pet peeve forced the uncloaking of this stalker who enjoys reading your info. sorry to make my first post a correction of an alleged correction but i find no run-on in the quoted fred's sentence, as, if anything, it is overly, not underly, punctuated; and that just a matter of taste.

the pause which need not have been accentuated was the last comma (before "and each is managed") in the series of commas delineating fred's three (be)causes of how "we learned...to distinguish between...the fire economy and...the p/c economy". note also that the 2nd two becauses are properly silent and should have been readily understood even if not spelled out; though, i can see if someone missed that then they might have read it as a run-on sentence.

my pet peeve, you ask? full disclosure: all those stifling grade school teachers way back when complaining about my run-on sentences.

how i learned to deal with it: the more the reader is careless, the more the writer should care less.


For example, we learned years ago to distinguish between asset price inflation and deflation in the FIRE Economy and goods and services price inflation and deflation in the Producer/Consumer Economy because the former drives the latter, (because) the former is more than ten times the size of the other in terms of aggregate payments, and (because) each is managed according to separate central bank policy.
(becauses in paretheses mine to illustrate the point)

[initializing cloaking device]

LargoWinch
07-12-09, 01:15 PM
hello forum. pet peeve forced the uncloaking of this stalker who enjoys reading your info. sorry to make my first post a correction of an alleged correction but i find no run-on in the quoted fred's sentence, as, if anything, it is overly, not underly, punctuated; and that just a matter of taste.

the pause which need not have been accentuated was the last comma (before "and each is managed") in the series of commas delineating fred's three (be)causes of how "we learned...to distinguish between...the fire economy and...the p/c economy". note also that the 2nd two becauses are properly silent and should have been readily understood even if not spelled out; though, i can see if someone missed that then they might have read it as a run-on sentence.

my pet peeve, you ask? full disclosure: all those stifling grade school teachers way back when complaining about my run-on sentences.

how i learned to deal with it: the more the reader is careless, the more the writer should care less.


(becauses in paretheses mine to illustrate the point)

[initializing cloaking device]

Well articulated post centsless.

Regarding grammar and typos, yes they can be found fairly often on iTulip. However, I am sure you will agree that the content, which is the reason all of us are here, is much more important that the form.

BTW, make sure to use the "uncloaking device" more often ;).

metalman
07-12-09, 01:40 PM
hello forum. pet peeve forced the uncloaking of this stalker who enjoys reading your info. sorry to make my first post a correction of an alleged correction but i find no run-on in the quoted fred's sentence, as, if anything, it is overly, not underly, punctuated; and that just a matter of taste.

the pause which need not have been accentuated was the last comma (before "and each is managed") in the series of commas delineating fred's three (be)causes of how "we learned...to distinguish between...the fire economy and...the p/c economy". note also that the 2nd two becauses are properly silent and should have been readily understood even if not spelled out; though, i can see if someone missed that then they might have read it as a run-on sentence.

my pet peeve, you ask? full disclosure: all those stifling grade school teachers way back when complaining about my run-on sentences.

how i learned to deal with it: the more the reader is careless, the more the writer should care less.


(becauses in paretheses mine to illustrate the point)

[initializing cloaking device]

not everyone needs to write like hemingway. the world needs james joyce, too.

centsless
07-13-09, 12:40 AM
Regarding grammar and typos, yes they can be found fairly often on iTulip. However, I am sure you will agree that the content, which is the reason all of us are here, is much more important that the form.

BTW, make sure to use the "uncloaking device" more often ;).

thank you largo, good to be welcomed outside federation territory within which i've lost much faith & a good portion of my net worth, apparently. so sorry i didn't find itulip before the crash. so glad i stumbled in before losing it all.

agreed that content is more important than form. i tried telling my teachers that my ideas meant more than my spelling but they marked me off nonetheless.

you'll pardon if i don't contribute much as i've not much to offer. just ask my grade school teachers. i still have so much to learn.


not everyone needs to write like hemingway. the world needs james joyce, too.

and, much to the chagrin of any irked by run-on sentences, jerzy andrzejewski's gates of paradise (http://en.wikipedia.org/wiki/Gates_to_Paradise).

flow5
07-13-09, 05:18 PM
The issue is not whether the US will have deflation or inflation. The problem is with stagflation, (business stagnation accompanied by inflation).

Import price rises will continue to outpace domestic price increases:



The U.S. Import Price Index rose 3.2 percent in June, the Bureau of Labor Statistics of the U.S.
Department of Labor reported today, led by higher petroleum prices. The June increase followed a 1.4
percent advance in May. Export prices also increased in June, rising 1.1 percent after advancing 0.5
percent in the previous month.



And with ever dwindling natural resources, and the unstoppable decline in the exchange value of the dollar, an ever greater number of citizens will experience a protracted decline in their standard of living.

metalman
07-15-09, 11:40 AM
The issue is not whether the US will have deflation or inflation. The problem is with stagflation, (business stagnation accompanied by inflation).

Import price rises will continue to outpace domestic price increases:



And with ever dwindling natural resources, and the unstoppable decline in the exchange value of the dollar, an ever greater number of citizens will experience a protracted decline in their standard of living.

yep, as predicted here... (http://www.itulip.com/forums/showthread.php?p=83348)

Fiat Currency
07-16-09, 10:04 AM
The issue is not whether the US will have deflation or inflation. The problem is with stagflation, (business stagnation accompanied by inflation).

Import price rises will continue to outpace domestic price increases:

And with ever dwindling natural resources, and the unstoppable decline in the exchange value of the dollar, an ever greater number of citizens will experience a protracted decline in their standard of living.

Well said my virtual friend. Well said.

I posted the last article to

(a) keep the thread "alive" as it's an important concept for new members to get their heads around
(b) to remind people that EJ already got this right

While I didn't expect FRED to shoot the article down in flaming glory (that was an added bonus :D) ... it's important for people that are seeking macroeconomic web-enlightenment to realize that there are other authors out there who often get some of the pieces right - and some deadly wrong.

In hindsgiht, perhaps I should have expanded on why I threw the article up in the first place.