It's a Great Time to Be an Inflationista 21 comments
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The debate rages: inflation or deflation? Which shall it be?
It should be obvious that it’s in the best interests of the monetary authorities (central banks et al) to create a muddy picture with respect to inflationary vs. deflationary expectations. Were they to allow it to become obvious that deflation is unavoidably coming, everyone would place the appropriate bets and deflation would be self-fulfilling. The same is true of inflation. Confusion reigns supreme, and this fact is, in my opinion, no accident. It is as it must be. Mixed signals, unclear information, even confusing policy responses can be seen as dezinformatsia.
As an inflationista, I am positively drooling. The stage is set for the kind of epic currency debasement that only happens once in a lifetime. Here’s why:
1. Inflation is now a contrarian position. A critical mass of MSM economic “authorities” seem to be on the verge of declaring that we are in a deflationary environment. A recent Forbes article sums up the arguments very well: falling demand, excess capacity, falling T-Bond yields, global recession, collapsing commodity prices. Consider the perspective of a central banker: if you want to inflate, you must first convince everyone that you had no choice but to do it.
2. Democrats control both houses of Congress and their margin is likely to increase. Democrats love to spend other people’s money. The fact that there is no money to spend has never stopped them. It only means more deficit spending via borrowing or printing. Congressional Democrats have already made pronouncements about the need for more stimulus packages, including direct stimulus to taxpayers as well as public works projects. Whether Obama or McCain wins is irrelevant. Since everyone is afraid of deflation, there is consensus for fighting it with stimulus and bailouts, as Congressional Republicans recently demonstrated.
3. The Federal Reserve is stepping on the gas quite aggressively, but the engine seems to be stuttering. A wall of new money has been created and thrown at the system; it hasn’t gotten any traction (yet). Central banks worldwide are onboard with a coordinated campaign of new money.
4. The political outcome of deflation is much more dire for the political / ruling class. Massive inflation means a lot of bitching and moaning by the populace, but the populace can still buy food and fuel. This has been pointed out elsewhere but it bears repeating: Mugabe is still in charge in Zimbabwe. The Zimbabwean economy still marginally functions. Inflation hurts lenders (banks) terribly, but they get to stay in business and remain at the top of the economic food chain. Deflation, on the other hand, means that no one can pay back their loans and this means default at both the micro and macro level. Mom and Pop and Bear Stearns both cease to function as going concerns. Deflation and default can also lead to nasty political upheavals, since freedom truly is just another word for nothing left to lose. Such upheavals are most emphatically NOT in the Central Banker’s Playbook.
5. Japan doesn’t matter. Japan has been able to limp along in its deflation and still survive without collapse. This was made possible by several facts: a) the Yen was not the world’s reserve currency; b) Japan had a huge base of domestic savings to tap; c) Japan had a huge and healthy customer for its export goods, so its economy could continue to make and sell goods abroad.
6. Inflation solves the debt problem by rendering it irrelevant. Debt is everywhere and is crushing economies all over the world, threatening a total systemic default. Currency debasement through inflation makes it possible to pay off debt, at least on paper. In such an environment, real things will cost a lot more, but the system remains intact with its existing political structure. I consider it undeniable that all that is required is to pump enough easy money into the system. Think about it in the extreme: If Treasury printed up and sent out checks for $500,000 to each US household, would there be a household debt problem? What would happen to house prices, and to the ABX indices and all those nasty CDOs? If there are 100 Million households, that act would require a paltry $50 Trillion. In a universe where credit default swaps are over $65 Trillion, what’s another $50 Trillion? We have already gotten into the $Trillions in our bailout efforts and it's not working yet. Learn to think outside the box.
7. Think “infrastructure”. Domestic spending will make it possible for debts to be repaid and people to work again. Construction provides the perfect vehicle for doing it; it is intensely local, and it is labor and material intensive. It is domestic. We will build roads, railroads, bridges, wind farms, power grids, you-name-it.
8. We have had real deflation for some time; if you factor in real rates (not silly government rates) of inflation, the economy has been shrinking for several years. What would a comparison of housing "appreciation" rates vs real inflation rates reveal?
We have had deflation; now we’re going to have inflation. Entry points for currency shorts have never been more attractive.
A word of warning: It may take some additional evidence of deflation to get the central banks to really hit the money accelerator. One should never push all of one’s chips onto the same square, and certainly not all at once.
Disclosure: Author is 50% cash and 50% currency shorts (miners, PMs, etc), but has begun incrementally moving cash into commodities and other suitable currency short instruments. I am not an investment advisor and I don’t play one on TV. DYODD.
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This article has 21 comments:
this does not need to be true if there is a gentle deflation.
your overall argument fails in that hyperinflation causes only slightly less damage than hyperdeflation. with hyperinflation
- retirees and poor are screwed
- budget deficits would run wild as tax revenues would be a year out of sync with government expenses.
- there is no incentive to sell as things will be worth much more tomorrow (economy would collapse).
jessescrossroadscafe.b...
Must first convince..... Bankster speak for bend over this isn't going to hurt me as much as it hurts you.
Bloody Banksters.
Since the last 8 years the GOP administration increase the US national by more more than 200%. It is the same here north of the border.
Conservatives inherited of a surplus in the budget, and now they are in deficit. last time we had a conservative elected in Canada, was M. Mulroney, friend of M. Bush and Reagan.
Guess What ? ...The national debt triple in 8 years !!!!!
The more conservatives say they care about public finance, more likely you, and your children's children will pay for it.
My two pennies, May send it to the treasury : ))))
Gilbert
Terrebonne, Québec
Good Job!
For the first of many articles this was well written on a difficult topic. The only slight difference of opinion is as mentioned above. In the end hyperinflation is just as bad as deflation. We have passed the point of no return and one way or another it will become very painful in the future for somebody, if not everybody.
Keep writing. moonbat, curbs, dozer, and I will keep tossing peanuts.
Congratulations from this peanut thrower too. I always enjoyed your comments.
Smarty,
You could go big time under your real name and then throw peanuts at yourself.
LETS GET JOB GROWTH AND ASSET PRICES TO BOTTOM AND START MOVING UP BEFORE THE EXISTING GAME IS OVER AND WE START UP AGAIN. We got time but the piece is appreciated because it
alerts us to what potentially lies ahead...only we do not know the timing yet....MarvinMBA
You could go big time under your real name and then throw peanuts at yourself" - moonbat
How do you think I got all those +1s? Hehehe.
I agree that the Canadian curency went down to .63 cents, like it droppes to .78 in two weeks. Why ? mainly as an important resources exporting country, our dollars goes down if the demands in such importing sectors are down.
At 63 cents some years ago, oil was cheap, gold was 300 an ounce and so on. On the other hand; low canadian dollar meant it was easier to export manufacturing goods. Manufacturing sector is in recession since 2006..
Let's remind us when the conservatives runned by Mulroney, with Michael Wilson as finance minister, they spent billions and billions for the only goal to maintain the currency. The national debt was about 240 B. and ended at 650 B.
I am tired of those politicians talking about cuts, cuts, cuts, strict economics, and at the end of it, the case is simply but surely worse.
And, unfortunatly, it is cruely true for those conservatives politicians.
anyway, I fear right now with all those monney printed, we going to crush currencies, wich could erase some of the debt, but create a LOT of inflation. Maybe some major currencies could be history within months. The US dollar could one of them.
Good election night to you all.
Ciao
Gilbert .:
On Nov 04 12:34 PM bowman711 wrote:
> I would remind Gilbert of Terrebonne, Québec that it was durning
> the Canadian Liberal Party's tenure that the Canadian dollar dropped
> to a low of 62-cents when compared to the U.S. dollar. What the Liberals
> were saying, in essence, was that Canadian business couldn't compete
> with American business in productivity and effeciency so they had
> to bring the Canadian dollar down to make it SEEM Canda's products
> were cheaper.
* When Bush I left office 12 years later, it was $5 trillion.
* In Clinton's 8 years, it rose to $6 trillion.
* By the time Bush II leaves office, it will be at or close to $11 trillion.
See any pattern here?
The US will create trillions of dollars of new money instead of unsustainable debt (we can even retire all or some of the existing national debt). The increased supply of US dollars will cause asset, price, and income inflation. The housing crisis will be "solved" by higher house prices and incomes. Lenders, renters, and anyone depending on fixed income (e.g., pensions, CDs, or -- surprise! -- US government bond) loses.
Oh, and oil is $1000 a barrel, gas $50 a gallon. Guess you can't have everything.
It may take as long as 1-2 years, it may not, I don't know. I am convinced it is coming in a big way, and I expect it in the near term.
The hand,
I never said inflation would solve anything or was more desirable from my perspective, I just said they're doing it. One of the predictors I use for government actions is this: if there are more reasons to do something than reasons not to do it, they will do it. Morality and notions of right and wrong do not calculate in.
Alan,
Thanks for the data points. Another thing I am watching and trying to get a handle on is 10-year T Bond rates and whether ( and for how long) these rates can be sanitized by the Fed in the face of historic borrowing levels by Treasury.
bosun,
We'll know we're in real trouble when the this year's 1040 shows up with a package of "KY Yours and Mine".
Resident democrats,
I didn't mean to imply that there were any small government Republicans still in office (save one). But you guys love other peoples' checkbooks like no others. Call me in four years and we'll talk about deficits.
Peanut gallery: Thanks for the peanuts!
he U.S. debt is so far out of control that the only way to pay it off is inflation. TRhe dollar rise is simply a function of del3everage. Contrary to popular opinion, this is not a multi year process. The hedge funds that had to sell have already sold (why would they wait for commodity prices to fall). This explains the massive drop in the value of stocks. The election is over---strangely gold shot up when the stock market opened in New York (as opposed to falling when the short sellers hit it) Nov 4 (election day). The dollar dropped substantially. It may have already started. There will be no lasting deflation. There will be inflation. Gold will shoot up . Make money while you can. Obama will outlaw private ownership of gold and silver.
It only makes sense that paying debts with inflated currency is how Dems will pay for their socialist agenda.
As if Americans will tighten their belts and SAVE, we need an inflationary fix.
Hard assets will rule, inflation will also solve the housing crisis, remember the 70's
I'm not so sure we will get inflation right away. The issue is that the mortgage backed CDO's are still unwinding. Banks are hoarding cash instead of lending to ensure their own solvency as they expect to have to take write downs as these debt positions are moved onto their balance sheets. Also, these CDO's (and other exotic financial instruments) were one of the primary ways that the worldwide economy was able to create cheap money - far more than has been provided by all of the governments so far. Now that everyone knows what games were being played, the jig is up. The CDO market's are crashing. New money from these derivatives is no longer being created AND as the CDO's are written down, money is actually being sucked out of the sytem. This appears to be happening at a much faster rate than the world governments are able to generate new money.
Next, we know that worldwide governments are now promising to "regulate" the financial markets. This is bound to have a cooling effect on the ability to create new money through credit derivatives since the "risky" activities of the past will be disallowed. Don't forget that part of how we reached the current crisis was through easing of regulations. Re-regulate and that slows the money/credit engine down . . .
The there is the risk of the "liquidity trap". All one has to do is look at Japan's economy for the last 15+ years to see that even when the federal government drops the rates down to 0% it does not always cause inflation . . .
Also, one has to think about the possibility of shifts in attitudes - I am talking about the consumers, the bankers and businesses. Because people (consumers) believe the economy is getting worse, and they may be at risk of losing their jobs, they are choosing not to spend - this feeds the deflation spiral. Next, the banker does not want to lend money in an economic downturn due to fears of not being paid back resulting from defaults, etc. The business owner cuts back on capital spending since it is an unknown if that additional debt may push the business under. Bottom line - there are now attitudinal headwinds that may well prevent or slow the takeup of inflation despite the best efforts of governments.
Clearly, there is a benefit from dropping fed rates worldwide since it provides a back stop and helps to capitalize banks so they do not fail. Having said that, I am not at all convinced that we are suddenly going to see a resurgence in inflation in the near term. It does seem more probable that we could see a gradual increase in inflation further down the line once markets first stabilize, attitudes towards lending/borrowing ease and possibly, once the new financial regulations are eased somewhat and "tweaked".