1-Jul-10 News -- World economy in deflationary spiral

[John]

1-Jul-10 News -- World economy in deflationary spiral

** 1-Jul-10 News -- World economy increasingly in deflationary spiral
** http://www.generationaldynamics.com/cgi ... 01#e100701

Contents:
"Wall St. stocks fall 10% in second quarter"
"Increasing signs of a deflationary spiral"
"Additional links"
European banks and bond markets are back in crisis mode
Spain grinds to a halt on third day of strike
Moody's says it may lower Spain's rating
Standard & Poors says it may lower Moody's rating
Is there any point in teaching young people about the Holocaust?
Obama remains committed to closing Guantanamo
Petraeus says we could be years in Afghanistan
Medvedev warns that Kyrgyzstan's government is close to collapse
Uzbeks in Kyrgyzstan are looking for revenge

[vincecate]

By the Law of Mean Reversion, the stock market has to fall to at least the Dow 3000 level. This is a mathematical certainty.
[...]
But it is coming with absolute certainty.

John, I buy your theory, I agree with the vast majority of what you write and find it interesting and insightful. I am a fan. But I wish you would not say things like, "This is a mathematical certainty." If Obama makes the Fed send everyone in the US a check for $50,000 then the Dow will never see 3000 again. It could happen. People in the US are far too tolerant of crooks running public companies and stealing investors money, so I think they will get a crash to sort of correct this character flaw in the coming generations. But it really makes me uncomfortable when you say a particular number for a stock index is a mathematical certainty. I don't buy that. Maybe they will send out checks to prop it up for a few more years and the crash will be from 20,000 to 5,000. I think the crash is soon, and 3000 is plausible, but talking about the future with such certainty seems wrong.

[mannfm11]

There must be some really good new drugs out there. If Obama sent everyone $50,000, we might go to zero. Where would he borrow it? In any case, I think we already saw the crash. The SPX went from around 1320 to 730 in 3 months and to 666 in a little over 6 months. Some of the days in September and October 2008 looked on the charts just like the ones in October 29. I saw a 1000 point rally from 10 minutes to 3 easteran to 3:30 only to plunge 400 points into the close on October 10. The market went up 1000 points on October 13, opened up on the 14th and retested the lows close to 2000 points down later that week. 2500 points down, 2000 points up and then 2000 points back down in 2 weeks is several crashes. The day they passed the TARP, I recall the Dow was 10,800 or so. A week later it had touched 7800 and change.

In any case, I think we are going to see the wipeout. There were a lot of people that stayed in, but there were a lot that got out and there was a lot of big money that got back in, not to mention the banks. I'm expecting a loss that will match the 1929 decline, if for no other reason than we have already seen it in Japan. I'm betting under 3000 and I think Prechters target under 1000 is in play. 19 years after the Japan bottom we saw the market hit 6600, which is about 16% of where it was at the start of 1990. It isn't done going down either most likely

[vincecate]

There must be some really good new drugs out there. If Obama sent everyone $50,000, we might go to zero. Where would he borrow it?

"But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." - Bernanke

http://www.federalreserve.gov/BOARDDOCS ... efault.htm

For anyone who believes deflation is a hard problem in a fiat money system that whole paper is worth reading, but particularly the next 2 paragraphs:

"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal."

"What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. "

It is reasonable to view the S&P as a currency traded for dollars. On most days that the dollar goes down significantly the S&P goes up and vice versa. If the dollar were to crash over night I would expect the S&P, measured in dollars, to go up. If it became clear that Russia and China no longer wanted to pay the US inflation tax and were trying to get out of their dollars, the dollar could crash in a very short time period.

http://pair.offshore.ai/38yearcycle/

I would also point out that like the US other people have printing presses. Their ability to print dollars that look just the same as US dollars is getting really good. In the island that I live on and the next island over many stores will not take $100 US bills as the counterfeits are so good that the machines used to detect counterfeits and the training papers for how humans can detect counterfeits are no longer able to tell. If the counterfeit guys move to $20 bills I think that US money would be in big trouble. Since passing $100 has to be much harder, I would expect them to move to $20s.

[thomasglee]

Are the modern definitions of inflation and deflation the same as they once were? I think not. As many have mentioned, we are headed into new territory where we old definitions no longer apply. How long before we end up on a totally digital currency? If we do go that route, will the terms of the past continue to apply? It is difficult to recognize something you can't see.

[Tom Acre]

... How long before we end up on a totally digital currency? If we do go that route, will the terms of the past continue to apply? It is difficult to recognize something you can't see.

We're almost there, as cash is such a miniscule part of "money". But as we are experiencing deflation (or disinflation as some call it) and as the inflationists don't seem to have a good handle on even the basics (for instance the components of money supply), I tend to side with the deflationists. OTOH, there are so many possibilities it is impossible to certainly predict how long the current deflation (or disinflation according to some) will continue.

For instance, if WWIII occurs what will a pair of trousers be worth, an iphone? If an HEMP or cyber attack buggers the national power grid, the trousers may quadruple in value and the iphone may be worthless, but don't try to pay for them with a credit card and it may take a while for checks to clear. Likewise, a condo in Manhattan would be almost worthless and a farm in Indiana would be a real asset. How would an economist define that state of affairs?

[thomasglee]

We're almost there, as cash is such a miniscule part of "money". But as we are experiencing deflation (or disinflation as some call it) and as the inflationists don't seem to have a good handle on even the basics (for instance the components of money supply), I tend to side with the deflationists. OTOH, there are so many possibilities it is impossible to certainly predict how long the current deflation (or disinflation according to some) will continue.

For instance, if WWIII occurs what will a pair of trousers be worth, an iphone? If an HEMP or cyber attack buggers the national power grid, the trousers may quadruple in value and the iphone may be worthless, but don't try to pay for them with a credit card and it may take a while for checks to clear. Likewise, a condo in Manhattan would be almost worthless and a farm in Indiana would be a real asset. How would an economist define that state of affairs?

All good points.

Frankly, I think many are letting themselves get distracted by arguing whether we are going to have inflation or deflation... the point is, we're headed for a heap of financial troubles and it really doesn't matter as the overall effect will feel the same to the average Joe.

[vincecate]

Frankly, I think many are letting themselves get distracted by arguing whether we are going to have inflation or deflation... the point is, we're headed for a heap of financial troubles and it really doesn't matter as the overall effect will feel the same to the average Joe.

But what is the best way for us to take care of our families depends on if we are heading for deflation or hyperinflation. If deflation we should pay off debts and save cash. If hyperinflation (or collapse of fiat money) then debts won't matter and we should put money into gold and silver.

It is a very important question and getting the answer right will probably make a big difference to how well we can provide for our families.

I like how Bernanke explained that the value of gold would drop if someone found a way to just make as much gold as they wanted. People agree, right? And then he says the US has a way to make as many dollars as they want. So it is easy to drop the value of the dollar, just make lots of them, right? Just like a way to make lots of gold would drop the value of gold, right? In 1929 they could not make all the money they wanted as they were tied to gold. In fact, as people took gold out of the system they were required to remove $2.5 dollars for every $1 of gold removed. So the deflation they had back then under this "inter-war gold standard" is no longer a threat on a pure fiat money system, right? Can any deflationists tell my why Bernanke's argument does not convince them?

If the US government in 1929 had a machine that could make all the gold they wanted, then the money situation back then would be like the money situation today. But since they did not, this time is different.

Or another way to look at it is when they went off the gold standard in 1933 the deflation ended. We are still off, so ...

[thomasglee]

If deflation we should pay off debts and save cash. If hyperinflation (or collapse of fiat money) then debts won't matter and we should put money into gold and silver.

It appears as if what you're saying is that if one is like many of us, they're screwed either way....

I'm betting on hyper-inflation. If we have deflation, I'm screwed. I can't pay off my debts (barely getting by just servicing debt) and really don't have the money to put into gold and silver (but I am through cash-flow management).

As I said, to the average Joe, the pain is going to be the same. JMHO.

[Higgenbotham]

I like how Bernanke explained that the value of gold would drop if someone found a way to just make as much gold as they wanted. People agree, right? And then he says the US has a way to make as many dollars as they want. So it is easy to drop the value of the dollar, just make lots of them, right? Just like a way to make lots of gold would drop the value of gold, right? In 1929 they could not make all the money they wanted as they were tied to gold. In fact, as people took gold out of the system they were required to remove $2.5 dollars for every $1 of gold removed. So the deflation they had back then under this "inter-war gold standard" is no longer a threat on a pure fiat money system, right? Can any deflationists tell my why Bernanke's argument does not convince them?

If the US government in 1929 had a machine that could make all the gold they wanted, then the money situation back then would be like the money situation today. But since they did not, this time is different.

Or another way to look at it is when they went off the gold standard in 1933 the deflation ended. We are still off, so ...

These are the issues we've discussed in this forum that Bernanke does not address in his speech (all of these issues have a bearing on the question of whether he can generate inflation through the creation of electronic dollars):

Effects of Fed actions on profitability and tax collections

Potential for resulting international trade lockups

International political realities

Dual nature of dollar (simultaneously debt and extinguisher of debt)

Multiple terms of dollar debt instruments and changing yield curves

Quality of debt instruments and changing credit spreads

Multiple forms of dollar (currency notes, commercial paper, derivatives, etc.)

Market preferences for various forms of dollars

Exogenous events (BP, terrorism, etc.)

Wage deflation and employment rates

Demographics

Generational dynamics realities with an emphasis on attitudes toward debt

Money velocity