Inflation, deflation, gold and currencies

[RDRUNR]

GD reader for years, forgot my account so I made a new one (sry); but I thought this topic was important enough to reply to.

I'm in the same camp as John here. (John is the smartest guy I've ever read on the internet so I feel great being in his camp!). I don't think either we are in a period of hyperinflation but are entering a period of deflation. When you have massive amounts of debt and less cash chasing them you either restructure debt (like Greece will do) and investors take a loss (30-50% talk here) OR raise interest rates to attract money to pay off your debt. With the US Dollar being the world reserve currency I do not see people fleeing it, in fact, like the crash of 2008/09 to my own surprise people flooded into the US dollar and stock market rather than flee the country that "caused it".

Gold and silver are speculations, not a safe haven. The price of both are so far in bubble territory you have to wonder who would want to own it. When you have the taxi driver, CNN, CNBC, Bloomberg say you need to buy it, everyone bullish on it then it's time to flee to the exits.

Position: I own NO gold or silver.

[jdcpapa]

I would like to chime in here as well. As I have mentioned in the past, I am doing volunteer work for state run agencies particularly in the "entitlement" area. These agencies are down sizing and "politely pressing" the volunteers to do more because of the wave a cut-backs coming. There is less disposible income and credit is no longer flowing like the days of the housing boom. The housing market, with the shadow inventory not yet unleashed and 25% percent underwater, is years from recovery. The construction industry is dead.

The demand for certain goods, because of shifting priorities,is declining and with that comes declines in price. I see major price reductions in some durables and although some items have increased at the grocery store, I also see others cut by 2-1 offers, etc.

The generational shift of the "baby boomer" generation is the proverbial "can't put a square peg through a round hole" scenario. There is going to be pain.

The debt ceiling and the resulting political bickering is no doubt going to cause worldwide concern or hype regarding the safety of the dollar. The dollar may take a hit on the short term because of fear and timing. It may flow over into the next generation ie after us "baby boomers" are gone.

I have no pm's. I rode the real estate and construction boom. My hedge so far has been to look closely at my costs and expenses and without changing my lifestyle have managed to deflate my budget. I have forecasted through my mortality. I have a time horizon issue because I expect next year to be living off my hard earned savings. In that sense no risk and relative liquidity is of prime importance. I am almost a decade away from SS and do not have it in my plan in any event.

With all that said: Deflation is rooting.

[vincecate]

Here is a good article on silver:

http://www.zerohedge.com/article/eric-s ... gle-digits

[vincecate]

I remember John saying something like, "everyone seems to be predicting hyperinflation". I would just like to point out that if it were really true that everyone was predicting hyperinflation, then interest rates on 10 year bonds would not be 3.5%. When people are rushing to dump their bonds, then you can say everyone is predicting hyperinflation. But not yet.

That's not true. Lots of people are buying Treasuries now because
they're considered safe, and that keeps yields down. Investors
believe they can quickly sell if yields begin to increase.

If we have 100% inflation for the next 10 years then dollars will be around 1/1024th as valuable 10 years from now. If people believed this was a real possibility they would not consider buying treasuries a safe investment. So far people don't really believe in hyperinflation. Time will come though. When you see people dumping bonds and yields shooting up, then you should believe.

[Lily]

http://finance.fortune.cnn.com/2011/04/ ... he-loonie/

This is a good article about the ongoing crash of the dollar. In order for Xenakis and Bernanke to be right, the dollar would have to get a lot *stronger*. Obviously opinions will vary on this, but I think anyone would be pretty hard-pressed to come up with any solid empirical evidence indicating how this might happen in the current environment, where the dollar is already dropping like a stone in a well. I think this article should help to show how much of a crazy made-up world those two are living in. I'm with Ron Paul on this one - the effect of our current (generational) civil malfeasance is to make the dollar lose value, not gain it.

[jdcpapa]

http://finance.fortune.cnn.com/2011/04/ ... he-loonie/

This is a good article about the ongoing crash of the dollar. In order for Xenakis and Bernanke to be right, the dollar would have to get a lot *stronger*. Obviously opinions will vary on this, but I think anyone would be pretty hard-pressed to come up with any solid empirical evidence indicating how this might happen in the current environment, where the dollar is already dropping like a stone in a well. I think this article should help to show how much of a crazy made-up world those two are living in. I'm with Ron Paul on this one - the effect of our current (generational) civil malfeasance is to make the dollar lose value, not gain it.

Ok! The dollar is going to lose value. But we are going to suffer some serious deflation. In fact we are in the midst of it. Let's get over this nonsense. It is all relative!

[Lily]

If you'd read the article, perhaps you'd be a little less quick to assume that both positions in the inflation/deflation debate have merit. I've yet to see any engagement at all from the deflation camp people with the main arguments of the hyperinflation camp. That is, I've yet to see anyone attempt to explain how absurdly excessive sovereign debt under a fiat currency, combined with massive long-term deficits and the loosest of loosy-goosey monetary policies, can possibly *fail* to produce runaway inflation.

The only argument from that side I've seen that even comes close to making sense is that the deflationary pressures are so incredibly strong that they will simply overpower the inflationary pressures.

But this is overly simplistic and seems to involve some wishful thinking. I've seen zero compelling arguments for how this could actually happen in the real world, nor what could possibly convince the Federal Reserve to ever *allow* deflation to occur. Deflation they can reverse by printing money, as they are doing now, but against inflation they have no real alternatives. They could raise interest rates and pursue the monetary tightening policy that the rest of the world is moving towards, but there are good and sufficient reasons why they aren't doing that already; namely, that the US economy is in such bad shape that if the government quit propping it up with made-up credit, it would immediately and catastrophically collapse.

[vincecate]

I've yet to see any engagement at all from the deflation camp people with the main arguments of the hyperinflation camp.

I agree. My main hyperinflation argument is that if people stop buying/rolling-over US government bonds then new money will be created to cover existing bonds coming due and the deficit. Together this is nearly $9 trillion in new money over the first 12 months. This seems to be the standard way hyperinflation happens, after bond sales fall off.

The only real response is, "that won't happen, people will always buy US bonds". This is not saying anything is wrong with the hyperinflation logic. They just believe that people will always buy US government debt. Hyperinflation has happened over 100 times and twice in America already. Standard way is bond sales are not enough, as was clearly the case in America's 2 previous hyperinflations. Holding a belief that hyperinflation can never happen to America is just an irrational belief, not a logical argument.

With the Fed creating around $1.5 trillion per year there are all kinds of signs of inflation but deflationists are still able to pretend there is no inflation. However, if the Fed ups it to $9 trillion over 12 months it will not be possible to pretend there is no inflation.

One argument is that since most of the time the Fed is just creating money on computers, and not printing it, we won't get hyperinflation. The idea is that if we don't see wheelbarrows full of money there is no hyperinflation. But this is foolish for several reasons. First modern countries like Argentina had hyperinflation that was mostly in computers. Second, if you have money on a computer you can withdraw it and they have to give you paper money. If the Fed does not have enough paper money to give a bank what they want to withdraw, the Fed would then print more paper money. So having it on the computer can be turned into real paper money.

A next argument is to claim that debt is money and so as the value of debt goes down the money supply is contracting. Well, in hyperinflation the value of long term debt can go to zero in the first month. After the value of long term debt goes to zero it does not even have any more theoretical deflationary power. So even if you buy this argument, it could only work for a limited time. But after seeing the value of a 30 year bond drop by a factor of 100 relative to money few people will still believe that a 30 year bond is money. And historically the collapse of the value of bonds when hyperinflation starts does not provide any deflationary pressure.

Another argument is that the government is just borrowing money and not printing money outright. If the government were borrowing it from the rest of the world (i.e. bond sales were fine) then there would be nothing to worry about. But when the Fed buys it is different. When the Fed buys government debt it does so with new money it creates. Fed profits are paid to the government. So when the government pays interest to the Fed, it gets it back in the Fed profits payment. There is no way the government is really going to pay off the loan from the Fed, and there is no real interest payment. So the difference between this and "just printing and spending the money" is just some accounting entries. Other countries with hyperinflation "borrowed" money from their central banks too. No difference than just printing and spending.

[Higgenbotham]

One argument is that since most of the time the Fed is just creating money on computers, and not printing it, we won't get hyperinflation. The idea is that if we don't see wheelbarrows full of money there is no hyperinflation. But this is foolish for several reasons. First modern countries like Argentina had hyperinflation that was mostly in computers. Second, if you have money on a computer you can withdraw it and they have to give you paper money. If the Fed does not have enough paper money to give a bank what they want to withdraw, the Fed would then print more paper money. So having it on the computer can be turned into real paper money.

That's not my argument. It's that as more credits and debits are created, they still sum to zero. In the old money systems, a note represented something that had tangible value, even if more notes were created than the underlying tangible they represented.

A next argument is to claim that debt is money and so as the value of debt goes down the money supply is contracting. Well, in hyperinflation the value of long term debt can go to zero in the first month. After the value of long term debt goes to zero it does not even have any more theoretical deflationary power. So even if you buy this argument, it could only work for a limited time. But after seeing the value of a 30 year bond drop by a factor of 100 relative to money few people will still believe that a 30 year bond is money. And historically the collapse of the value of bonds when hyperinflation starts does not provide any deflationary pressure.

That's not my argument either. If the underlying debt backing the paper goes down in value, all things equal, that is inflationary, true enough. That is why collateralizing Federal Reserve Notes with MBS is so dangerous, as I've noted. However, my argument is that debts exist in multiple interrelated forms throughout the monetary system and a collapse in value of the weaker debts that do not back the paper notes, all things equal, will raise the relative value of the paper notes.

Another argument is that the government is just borrowing money and not printing money outright. If the government were borrowing it from the rest of the world (i.e. bond sales were fine) then there would be nothing to worry about. But when the Fed buys it is different. When the Fed buys government debt it does so with new money it creates. Fed profits are paid to the government. So when the government pays interest to the Fed, it gets it back in the Fed profits payment. There is no way the government is really going to pay off the loan from the Fed, and there is no real interest payment. So the difference between this and "just printing and spending the money" is just some accounting entries. Other countries with hyperinflation "borrowed" money from their central banks too. No difference than just printing and spending.

I see the Fed as printing money outright, but the transmission mechanisms are limited and slow. However, if a corporation benefits they may be able to eventually pass some of that benefit on to those who don't receive the money directly. For example, I'm reading that starting salaries for new college graduates are up an average 3.5% recently.

[vincecate]

However, my argument is that debts exist in multiple interrelated forms throughout the monetary system and a collapse in value of the weaker debts that do not back the paper notes, all things equal, will raise the relative value of the paper notes.

Are you just saying that when the price of bonds collapses the relative value of federal reserve notes to bonds changes? This is the same thing as the price of bonds collapses, right?

Do you think that bonds dropping in value reduces the money supply and so would make commodities and other prices cheaper? Or would it have no impact on general price levels?