Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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. 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.

[occdude]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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.

[ltullos]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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?

[icm63]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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...

[goadam1]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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.

[c1ue]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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.

[Munger]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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.

[bart]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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...

[bart]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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.







Some or all of your concerns about Japan are addressed in Deflationistas get the facts wrong about Japan , especially the last chart in post #23.

[Basil]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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.

[LargoWinch]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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.

[Slimprofits]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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?

[BadJuju]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

Or maybe your best guess as to what we should be looking for in 2009.

That would be excellent to hear.

[we_are_toast]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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.

[icm63]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

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????