Deflation-Inflation argument heats up

[surfersdsb]

I have been on the inflation side of the argument for awhile. The recent decoupled move with oil and equities trading down and silver and gold trading up could be a sign that dollar devaluation/ inflation argument is starting to exert itself.

Two of the problems, the first is that the gold spec position is at all time highs and the second largest ETF after SPY is GLD. That makes me very nervous.

The second is that there is a very strong contingent of smart people who are making good arguments for deflation to take over on the next down move in the dow.

Read

http://www.zerohedge.com/article/so-...have-deflation

Watch
http://www.zerohedge.com/article/jan...er-it-was-2007

I now EJ has addressed many of these questions but I wonder if we would like to respond to a couple of the points made in these links.

My portfolio of cash, foreign bonds, mining equities and precious metals has performed very well over the past 18 months. I understand there are many gold bugs on this site. I would rather not have to go through a large gold correction, The arguments made in the links though are pretty persuasive.

surfersdsb

[GRG55]

Re: Deflation-Inflation argument heats up

I have been on the inflation side of the argument for awhile. The recent decoupled move with oil and equities trading down and silver and gold trading up could be a sign that dollar devaluation/ inflation argument is starting to exert itself.

Two of the problems, the first is that the gold spec position is at all time highs and the second largest ETF after SPY is GLD. That makes me very nervous.

The second is that there is a very strong contingent of smart people who are making good arguments for deflation to take over on the next down move in the dow.

Read

http://www.zerohedge.com/article/so-...have-deflation

Watch
http://www.zerohedge.com/article/jan...er-it-was-2007

I now EJ has addressed many of these questions but I wonder if we would like to respond to a couple of the points made in these links.

My portfolio of cash, foreign bonds, mining equities and precious metals has performed very well over the past 18 months. I understand there are many gold bugs on this site. I would rather not have to go through a large gold correction, The arguments made in the links though are pretty persuasive.

surfersdsb

Here's my immediate reaction to these so called arguments:

Unemployment
Wall Street Journal’s Scott Patterson writes that we won’t get inflation until unemployment is down below 5%...

The data does not support this contention.

US CPI and unemployment rates:
1979: CPI = 11.3% Unemployment: Min = 5.7% [June & July]; Max = 6.0% [Aug, Oct & Dec]
1980: CPI = 13.5% Unemployment: Min = 6.3% [Jan, Feb & Mar]; Max = 7.8% [Jul]
1981: CPI = 10.3% Unemployment: Min = 7.2% [Jul]; Max = 8.5% [Dec]

Looking at it the other way, the unemployment rate was below 5% every month in 2007. The annual CPI? 2.8%

Debt Overhang and Deleveraging

Steve Keen argues that the government’s attempts to increase lending won’t work, consumers will keep on deleveraging from their debt, and that – unless debt is slashed – the massive debt overhang will keep us in a deflationary environment for a long time...

Keen has it backwards. If we have deflation, the real cost of the debt increases. The debt will be slashed because of inflation...lots of inflation.

Flattening Yield Curve Points Toward Deflation

The yield curve flattens either because the long interest rates are declining or short rates are being pushed up [usually by the Fed influencing it by raising the administered funds rate]. In this case it's clearly not the Fed acting on the short end. But wait, look what the Fed is buying and putting on its balance sheet...longer dated Treasuries. Now why would they be doing that? Maybe they are afraid of deflation...:rolleyes:. In a world of Quantitative [Credit] Easing, somehow I doubt it.

Pension Crisis
Pension expert Leo Kolivakis writes: The global pension crisis is highly deflationary and yet very few commentators are discussing this...

Probably for a good reason. The easiest way to reduce the real burden on pension plans is to inflate away the obligation. Those on fixed pensions learned that lesson the hard way in the 1970s as they watched the purchasing power of their fixed income erode remarkably quickly under the relentless assault of compounding annual inflation.

and so it goes. But I have no expectation that one single deflationista will be converted by any of this so we'll just leave it at that...

[sunskyfan]

Re: Deflation-Inflation argument heats up

Mr. Potato Head! Mr. Potato Head!

Just preparing for the rush of comments from the gold crowd .... guess who is the gold bug in this clip .

http://www.youtube.com/watch?v=mNiiB...rom=PL&index=6

[Starving Steve]

Re: Deflation-Inflation argument heats up

How can anything deflate when Bernanke bails-out everything, debtors get to renegotiate their liar-loans, and the Fed buys its govn't debt offerings back and keeps interest rates at zero, for years at a time?

The whole deflation argument is bogus. Yes, there could be deflation if there were exports of real manufactured goods, but unfortunately, the U.S. lives off of imports. Yes, there could be deflation if there were fire-sales of assets, but there are no such sales; instead, banks are holding-back foreclosures and keeping asset prices up.

Yes, the CPI doesn't show inflation in cars or homes. But go buy the house insurance, pay the utility bills, the taxes, the permits, and the inflation is manifest and outrageous--- worse than ever.

[halcyon]

Re: Deflation-Inflation argument heats up

How can anything deflate when Bernanke bails-out everything, debtors get to renegotiate their liar-loans, and the Fed buys its govn't debt offerings back and keeps interest rates at zero, for years at a time?

So to you deflation means shrinking of Fed's balance sheet combined with the Fed funds rate?

If for somebody else the deflation means collapse in the total amount of private credit and the loss of circulation in commercial money aggregates in the economy (amount * velocity), then your inflation AND the other guy's deflation could both happen AT THE SAME TIME for a fair bit of time.

It all depends on what you mean.

Also, people should please stop assuming that just because some Austrian nut-jobs living in the 30s define "inflation" the way they do, that everybody else has to define it the same way, when in fact they are not defining it the same way! Modern mainstream definition still is (even if not accurately defined): increase in the price of goods. This is why it makes no sense to talk about 'inflation' without defining what one means. It's impossible to know where one comes from.

Talk/write about:

- increase in the supply of deep money (federal reserve money)
- increase in the commercial money aggregates (M0-M3)
- increase in the price of goods (i.e CPI or any other similar measure)
- increase in the amount of private credit outstanding

And always separate cause and effect! One doesn't always automatically lead to the other!

But please stop talking about 'inflation' or 'deflation' as if they were some well-defined monolithic terms where "printing money -> hyper-inflation in prices -> gold goes through the roof" causal-mish-mash is the only 'definition' used to think with. It's not. And shouldn't be.

That's not only counterintuitive, but conceptually messy and will risk YOU losing YOUR wealth, because you have too blunt instruments to think with and you can't understand what is going on.

Read more, divide the concepts. Look again. All will become clear. BTW, EJ's writing should be revisited every time a person gains more understanding about the aforementioned concepts. They open up more with each reading.

[jtabeb]

Re: Deflation-Inflation argument heats up

Here's my immediate reaction to these so called arguments:

Unemployment
Wall Street Journal’s Scott Patterson writes that we won’t get inflation until unemployment is down below 5%...

The data does not support this contention.

US CPI and unemployment rates:
1979: CPI = 11.3% Unemployment: Min = 5.7% [June & July]; Max = 6.0% [Aug, Oct & Dec]
1980: CPI = 13.5% Unemployment: Min = 6.3% [Jan, Feb & Mar]; Max = 7.8% [Jul]
1981: CPI = 10.3% Unemployment: Min = 7.2% [Jul]; Max = 8.5% [Dec]

Looking at it the other way, the unemployment rate was below 5% every month in 2007. The annual CPI? 2.8%

Debt Overhang and Deleveraging

Steve Keen argues that the government’s attempts to increase lending won’t work, consumers will keep on deleveraging from their debt, and that – unless debt is slashed – the massive debt overhang will keep us in a deflationary environment for a long time...

Keen has it backwards. If we have deflation, the real cost of the debt increases. The debt will be slashed because of inflation...lots of inflation.

Flattening Yield Curve Points Toward Deflation

The yield curve flattens either because the long interest rates are declining or short rates are being pushed up [usually by the Fed influencing it by raising the administered funds rate]. In this case it's clearly not the Fed acting on the short end. But wait, look what the Fed is buying and putting on its balance sheet...longer dated Treasuries. Now why would they be doing that? Maybe they are afraid of deflation...:rolleyes:. In a world of Quantitative [Credit] Easing, somehow I doubt it.

Pension Crisis
Pension expert Leo Kolivakis writes: The global pension crisis is highly deflationary and yet very few commentators are discussing this...

Probably for a good reason. The easiest way to reduce the real burden on pension plans is to inflate away the obligation. Those on fixed pensions learned that lesson the hard way in the 1970s as they watched the purchasing power of their fixed income erode remarkably quickly under the relentless assault of compounding annual inflation.

and so it goes. But I have no expectation that one single deflationista will be converted by any of this so we'll just leave it at that...

But it bodes well that smart people are really getting it wrong, that means that the all-in inflation play is not ON yet and there is still time to get your "bullion-on" as a friend of mine says.

Bottom line, I think we have reached "peak Deflation talk", a contrary indicatior, me thinks. We shall see.

[sunskyfan]

Re: Deflation-Inflation argument heats up

Gold is a good insurance idea whether we have inflation or deflation at least in the current situation. As an investor you may loose a big chunk of your ass with gold but that is true of ANY investment in the world today. So let's put aside the gold question.

From the supply and demand point of view it would seem that there is a great deal of pent-up demand for the dollar to service debts that have been contracted in dollars. It is true that the FED can produce dollars to meet the demand but VALID entities must distribute those dollars. Do you see any banks out there with enough credibility that you would sign a contract with to make those dollars "real"? I don't. And, the US Government can't spend enough through the traditional budget construct to significantly effect the balance either. So until the day there is enough money creation vs the money destruction that is going on with the huge debts there will be a not enough dollars chasing a lot of bad debt obligation. That sounds like a deflationary recipe to me.

[GRG55]

Re: Deflation-Inflation argument heats up

Gold is a good insurance idea whether we have inflation or deflation at least in the current situation. As an investor you may loose a big chunk of your ass with gold but that is true of ANY investment in the world today. So let's put aside the gold question.

From the supply and demand point of view it would seem that there is a great deal of pent-up demand for the dollar to service debts that have been contracted in dollars. It is true that the FED can produce dollars to meet the demand but VALID entities must distribute those dollars. Do you see any banks out there with enough credibility that you would sign a contract with to make those dollars "real"? I don't. And, the US Government can't spend enough through the traditional budget construct to significantly effect the balance either. So until the day there is enough money creation vs the money destruction that is going on with the huge debts there will be a not enough dollars chasing a lot of bad debt obligation. That sounds like a deflationary recipe to me.

I don't agree. The US government is setting record deficits...deficits that only a short time ago were considered unthinkable. That money is not going under the mattress in the Lincoln Bedroom. It's being spent and levered and recycled. And if more is needed, then stimulus and deficits will be expanded again. For those who think that this would be reckless I would respond that what is occurring now is already reckless, so what's to stop the policymakers? The relevance of lending and credit availability from the favoured few "State-backed-too-big-to-fail" banks is not nearly as important as pundits are making out.

As for inflation concerns, we are witnessing yet another delusion based on heavily massaged official statistics. Here's an interesting chart from this weekend's NYT. People are buying the new, smaller "Family Sized" box of Wheat Puffs at Costco at the same price they paid last year. That's inflation. The "substitution" mechanisms used in the CPI calculation are holding the number down...but inflation is alive and well and we can be assured that policymakers will remain behind the curve in their response all the way through this cycle...and all the while denying that there is a problem, while the stimulus spigots are opened wider and wider.

GDP comparisons with the 4rth Q 2008 and 1st Q 2009 are going to look pretty good, risking another lift off in the financial markets as the "animal spirits" are nourished anew.

What's not to like?

[Starving Steve]

Re: Deflation-Inflation argument heats up

The over-all cost of living is how I define inflation, whatever anyone else says. And when that cost goes up, we have inflation.

Everything is fine in America until you get sick and go to hospital. Then we have hyper-inflation in everything. Even the cost of health insurance is hyper-inflating, whether you are sick or not.

Buy the house at near record high prices ( 2003-level prices, according to the nationwide statistics now ), the inflation still looks quite serious. Then go pay for the up-keep: the water, the gas, the electricity, the taxes, the repairs, the upgrades, the insurance, the subdivision or condo dues, the permits, the expediter fees, the closing costs on the sale, on and on and on, and the inflation looks a little more than serious; it looks like inflation is exploding.

Just like when you go to grocery store. The advertised sale prices look just lovely. But then add-in all the other things you have to buy to make meals, and the picture changes to one of hyper-inflation. Even the heretofore free bags to carry your groceries inside cost you extra.

So just who is the Federal Reserve Bank trying to fool? According to Bernanke and his bunch, there is price deflation now.

Sure income taxes are not higher than before, but then add-in state taxes which are exploding. Then add the municipal taxes. Then add the deficits that are cleverly swept under-the-rug and onto your children's shoulders; those are all part of your tax bill. Again, the picture is one of inflation exploding.

And we haven't had enough of the hidden costs of inflation yet? Coming soon will be the hidden costs of carbon taxes, carbon accounting, carbon-trading, carbon- banking, carbon planning, climate planners, the costs of green zones in cities, green police, etc.

"A climate crime" is what Greenpeace, this past week in Ft. McMurray, Alberta, called the development of the tar sands. "A climate crime"! So, we soon will be paying carbon taxes, carbon penalties, and carbon permit fees on that project, all hidden in our cost-of-living, too.

Is it any wonder that Greenpeace and governments are in bed, together?

[thunderdownunder]

Re: Deflation-Inflation argument heats up

There is an old and very true saying that you can't have inflation in a graveyard.
A graveyard is what exists around the World at the moment.

Deflation is to be avoided at all costs in a Fiat monetary system because of what effect it has on Total debt. That is why the whole World was tapped on the shoulder and got behind the BIG push to flood all economies with money. It simply cannot be allowed to go into a "down spiral". The effects would be catastrophic as it eats its way through a debt based World. Total economic collapse and social upheaval would ensue.

Bernanke was right to say "Drop money from Helicopters" All nations must Inflate enough to keep the spiral from forming. If things get worse and the engine starts to splutter and die (we seem to be at this point now) they will pour more fuel on the Fire until it ignites the engine of growth. As it roars back they have the means to damp it back down to avoid an over rev which would see hyperinflation.
Like it or not you will get inflation from a low base and they won't back off until they get the main parts of the World economies running in a self sustaining way.
It may sound over simplistic but in reality they are damned if they do but Dead if they don't. I will add this as confirmation that Helicopters are idling on the pad
http://www.bloomberg.com/apps/news?p...d=aaqA40k28UJY
I Tulip through EJ has made some bold predictions - and looking into the future using current facts is an impossible task if you are seeking 100% certainty. Time lines blur, interventions are put in place and unforeseen or contemplated "events" may or may not occur that have material effect on predictions.
OK it is a little blurred and the Algorithms complicated but the Ka -Poom is still intact. Preservation of Capital should be your main target not profit. Tread your own path with a relaxed conviction that the Natural World will give you its free gifts regardless of Mans greed.
I for one will go Fishing with my Children and continue to enjoy all the things that really matter. Life is short live it long ;)

[swannmex]

Re: Deflation-Inflation argument heats up

Not sure I get it. "guess who is the gold bug in this clip." Well, not sure who you think the "goldbug" in the clip is but my guess is he is the guy who figured out what was coming and did something about it.

I am a "goldbug" and proudly so. I started investing in gold seriously in 1999 and went "all in" in 2002. Bullion and Jr. miners. I have made tons of money investing in gold and gold miners. The "goldbugs" have been right. The HUI is up 1000% since 2001. I have had a plenty good laugh debating the merits of gold investing and how this would play out over the last several years. So many investors were afraid to appear "unsophisticated" they simply could not invest with the "goldbugs" in the barbaric relic. The goldbugs were right. Hasn't that dawned on you yet???

Good luck to all of us.

[Starving Steve]

Re: Deflation-Inflation argument heats up

You sound just as confident about gold now as the way Bob Brinker (on Money Talks on ABC network radio, weekends in the U.S. ) was about American stocks--- until the 2007-2009 crash and massacre. Could it be that gold now has hit a permanent top at or just above $1000 per oz?

I remember every weekend how Bob Brinker would laugh at stock market bears. He used to call Alan Greenspan, "the Maestro". So could it be that you now are making the same mistake as Bob Brinker made; i.e, falling in love so much with your investments that you become blind to what could happen?

[swannmex]

Re: Deflation-Inflation argument heats up

Of course that is possible. We all pay our money and take our chances.

I just get tired of people ridiculing "goldbugs" when in reality gold investors have been correct about how this would play out. Gold and gold related investments have outperformed most investments for the last 10 years by a very wide margin. The sophisticated Wall Street types who roundly dismissed gold in favor of "structured finance" have been proved dead assed wrong.

Going forward we all have to place our bets. I wish you luck whatever you choose.

[swannmex]

Re: Deflation-Inflation argument heats up

Allow me to add, the fact that EJ still sees $2,500.00 gold before this is over, gives me great comfort.

[FRED]

Re: Deflation-Inflation argument heats up

Of course that is possible. We all pay our money and take our chances.

I just get tired of people ridiculing "goldbugs" when in reality gold investors have been correct about how this would play out. Gold and gold related investments have outperformed most investments for the last 10 years by a very wide margin. The sophisticated Wall Street types who roundly dismissed gold in favor of "structured finance" have been proved dead assed wrong.

Going forward we all have to place our bets. I wish you luck whatever you choose.

Indeed! We've been arguing with gold bashers since 1998. Gets old! Our latest on the subject: Catching a gold basher