Inflation Is in Our Future...Not Deflation 35 comments
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In true linear fashion, with the blinders forcing a laserlike beam into the distant future, the deflationists have made their case. It won't hold water and certainly won't prepare any active investor for the future. Inflation is caused by two things - and two only!
1. The expansion of the money supply through credit.
2. The movement of that money through the economic system. That movement is velocity.
Put simply, there has to be ammunition and people have to use it. Japan has been mired in a stagnant economy in spite of very easy credit for a number of cultural reasons, none of which apply to the United States or most other developed and developing countries. A rigid corporate structure that doesn't reward or develop entrepreneurship combined with a very conservative aging population has meant that available credit goes begging. That won't happen virtually anywhere else. Japan has always been a one off event.
The fall in prices that's very evident in almost every category is not indicative of longer term deflation. It's a result of the freeze up of the flow of credit through the system and it is a temporary event. The sequence we are going through and will go through moving forward is likely to follow this course...
1. Recognition of the misallocation of assets and the realization that money and wealth has moved from less capable to more capable hands. This process will continue through the Winter of 2009. The surprises continue, but the large players are mostly accounted for and the markets have digested them.
2. An infusion of credit into institutions that have the power to create credit and expand the economy. This has been done (and will be done further) on a massive scale involving TRILLIONS of dollars. It will also involve TRILLIONS of Euros and even Yen (that is an ongoing story).
3. The next step will arrive with the Obama Administration. It will involve very substantial build-out and buildup projects and run close to another TRILLION dollars when all is said and done. This will be accompanied by tax cuts...and the critical pressuring of financial institutions to start the credit expansion process on a huge scale. There is NO shortage of willing borrowers and the money will flow into a small business expansion that will boggle the imagination.
4. Not enough credit and money...don't worry, there's plenty more where that came from.
That outside agency some people need to see for inflation to take place? The Fed. The Fed is going where no central bank has gone before. It has redefined itself in the last two months and is now the buyer of last resort for everything from useless paper trading vehicles to longer term Treasuries. This is a seminal set of events and must inform even the most ideological deflationists that something is very different this time.
The final nail in the deflationist retro vision is the myth of the Great Depression..and how it is coming back to haunt us. A few face offs are necessary...
1. The Fed of the Great Depression era stimulated very haphazardly. The United States labored under the old fashioned notion that deficits and spending matter and that moral hazard was a reality of business life and not merely an overworked phrase journalists throw around. This really put a crimp in ending the deflationary spiral of the time, so there were fits and starts and near recoveries and then severe relapses. Not so in 2008. Moral hazard was dead and buried months ago (at least) and you won't hear much from the Obama Administration about the importance of reducing deficits..in fact, they'll tell us that's irrelevant.
2. The Great Depression era was peopled by and large by individuals and families that abhorred debt and spent sparingly. It was a hunker down society that made do on pitiful amounts of consumables. Imagine that in 2008 and beyond..the American character is ingrained with borrowing and spending and it will manifest itself by a rush towards credit that's going to leave many dumbfounded. Balance sheet pumping will replace this very temporary balance sheet repairing we've seen. This process isn't simply a matter of getting people on their feet again... IT'S A MATTER OF SOCIAL STABILITY. Things will fall apart and anarchy will rule if not done rapidly. This not a society, any longer, that handles NO well.
Relative to other currencies the US$ will hold its own. It will only depreciate in the sense that by mid 2009 it's going to take many more of them to buy the things had on the cheap now. Food will be MUCH more expensive... fuel... resources of EVERY kind and type. The idea that the laws of physics and iron laws of supply and demand for goods and services have anything to do with what we will face soon enough is highly misleading.
The first thaw in credit will be in March or April and it will be a flood by June and July. Fill up your tank with cheap gas now..it's likely the last you'll ever see.
Recommended investments to ease into by Spring 2009:
Disclosure: Long GCS (1000 shares) and SLV (500 shares).
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This article has 35 comments:
This is beyond stupid. With very high unemployment, already high debt, and houses already full of discretionary stuff, banks going back to sane lending criteria, somehow in your fantasy world the seachange demand destruction will magically reverse itself, and violently, because why?
Because you own gold and want it to?
Lets just look at what we have now...were probably in a Depression and probably will stay that way until jobs show up and people start buying real estate...its that simple...MarvinMBA
Unless this halts and credit markets get flowing anytime soon, there will soon be less dollars floating around the world doing what dollars do, such as satisfying oil contracts. Heck, if deflation goes far enough, we might not see inflation at all. If so, the dollar should regain much of the value it lost since the 80's and since 2002. Especially, if the government regulates derivatives and the like, which they probably will do...thanks Madoff, et al.
Just think, all that money disappearing from and (a portion of it) magically reappearing in our banking system as fresh resource for asset investment and (tighter) credit. Inflation is all in the timing. If credit markets flow too soon, yes, hyperinflation. If deleveraging takes a good while, well maybe not (as the available money might just be less than this year's level.)
Folks are going to think twice about investing in MSBs and banks are gonna think twice about lending, at least until until asset values stabilize...which probably wont happen until deleveraging slows and lending starts anew...which probably won't happen until toxic debt is cleared form bank ledgers. Which probably means a good long while...
The U.S. will always be relatively more spendthrift than Japan, but the comparison between nations is not helpful here. America 2010 will not spend like America 2000. Deflation is here, and it will last until the economy recovers. (Although Obama's green policies could help send energy prices higher, leading the uncritical observer to assume stagflation).
I may be as wrong as anyone else but that is how I see things.
Greg Pinelli has been known to all of you as "Georealist", He can't change his views regardless of the Title of the article or his own handle.
Its all about inflation not deflation.
Take my new Handle, I changed it from paultaut to Aitvaras to get away from the personal abuse I was encountering.
So when you read the Title of any Article by Mr. Pinelli, you can be sure it will be about Inflation.
IMHO
the people suffering from this fear are usually suffering from fear of inflation...
they have changed their minds and are sh*t scared...
they are only opening the liquidity taps because of their great fear of debt deflation and its disasterous consequences...
when they cease to fear deflation they will turn off the taps...
unfortunately for those who are less than solvent...the banks will not lend
...those that are solvent do not wish to borrow at this time...
the prices of goods that require credit is falling fast...
the atm of home equity is history...
the liquidity being created is locked in the banks...
only the truth about balance sheats will change that situation...
we are in a bear market that started in january 2000 and the 2003-2008
rally was fuelled by real estate bubbles and equity release...
this is now over for the foreseeable future...
the next period will be about retrenchment...unemplo... falling demand and falling prices...
the banks are bust...the automakers are bust...many retail chains will fail
the consumer is being bitten and will remain shy...
if it takes this amount of liquidity to get things going...how will they keep going when it is turned off...
alla kings horses an alla kings men cannot get this humpty dumpty together again...
The world as a whole is creating new money but no one is buying anything with it. Without Demand, inflationary pressures are nonexistent.
Even when infrastructure projects begin Worldwide, the only inflationary pressures will be from those materials in short supply. Inventories are excessive, how long it will take to deplete them will be another issue.
Deflation is the Now. IMHO
BTW I notice that CDE is not among the favored investments. The "premier" silver company of the World is not even a footnote.
For a person who continues to purport to be Inflation oriented, his disclosure regarding the ownership of just two amounts in the Form of ETFs brings his knowledge of the various companies comprising the Gold and Silver Sector into question. IMO
What is the Shaw Group doing with this grouping?
1) FDIC insurance means there will never be another nationwide run on the banks of the scale we saw in the 30's. The small scale, supposed "runs" we have seen were people who wanted to avoid the inconvenience of having their money tied up for a day or two and/or who were ignorant about the FDIC (after all, 30% of Americans can't identify the Atlantic Ocean on a map).
2) The government has unleashed a blitz of money creation, the exact opposite of the contractionary policies pursued at the start of the depression that most economists attribute as the cause of those times being a deflationary depression rather than a recession. Lesson learned and lesson applied.
3) Banks have already been recapitalized, and are sitting on hundreds of billions of dollars in excess of their required reserves. Everyone knows more money will be loaned to them if needed.
4) The national debt is trillions of dollars, which itself provides a limitation to the dollar's appreciation, but more importantly ensures that the government has an incentive to prevent the dollar from appreciating vs. other currencies.
The author's premise that precious metals will do well in such a future environment is another topic though. PM prices depend on what investors' EXPECTATIONS at any given time of what the inflation rate will be in the future. They do not historically track what inflation actually is, as another recent SA article pointed out. At $800+ per ounce, gold has a historically high inflation expectation for the future (perhaps 9+%) priced into it already. Even if actual inflation skyrockets in late 2009 or early 2010, PM's might not go up if investors see the fed jacking up interest rates to control it, as they did in the early 80's. No PM investor wants to get wiped out like that again. The only reason to buy PM's is if you think current expectations of future inflation (9+% today) are lower than future expectations of future inflation will be (say 15% in 2010) among potential gold buyers. Seeing higher actual inflation in the future does not necessarily mean expectations for the future will be higher in the future. Inflation expectations are forward looking, not current.
Also, the presumption that a massive buildup of government debt will lead to long-term inflation or devaluation ignores the history of the post WW2 period, when debt-to-GDP skyrocketed yet inflation quickly stabilized. It also ignores the fact that international investors have not punished Japan or Europe for debt-to-GDP ratios far in excess of the US. If the post-recovery Fed quickly mops up the excess dollars by selling their many newly acquired assets and raising rates, inflation (AND expectations) could return to around 3% as they did under Paul Volker (former fed chairman, current Obama brain trust member), which would devastate anyone in precious metals.
And it most certainly is..Those who wait for prices to start rebounding before they recognize the EFFECT of credit expansion will already have lost the investment edge. Keep your money in hand for the next few months..except for gold. I strongly suggest that anyone not in physical gold begin NOW..
The idea that prices are going to sink..or that the Fed can kill inflation and precious metals won't prosper is a nonsequitor..They ALWAYS prosper in extreme credit creation conditions. Beggar thy neighbor currency devaluations don't mean some currencies are strong..only that some are sinking more slowly.
And turn off your CAPS, shouting doesn't help your "logic"
On Dec 24 02:57 PM Greg Pinelli wrote:
> Readers!!! The above article was MISTITLED by Alpha..it is supposed
> to be INFLATION IS IN OUR FUTURE..NOT DEFLATION....
> And it most certainly is..Those who wait for prices to start rebounding
> before they recognize the EFFECT of credit expansion will already
> have lost the investment edge. Keep your money in hand for the next
> few months..except for gold. I strongly suggest that anyone not in
> physical gold begin NOW..
> The idea that prices are going to sink..or that the Fed can kill
> inflation and precious metals won't prosper is a nonsequitor..They
> ALWAYS prosper in extreme credit creation conditions. Beggar thy
> neighbor currency devaluations don't mean some currencies are strong..only
> that some are sinking more slowly.
The Federal Reserve has been hinting lately that they are 'evaluating the merits of purchasing longer dated US Treasury securities' (the quote is a paraphrase). The Fed is adamant about stimulating the US economy. They know as rates fall and treasury bond prices rise, the threat of a falling dollar will prompt foreign bondholders to sell. Who will the buyer be? The US Federal Reserve. BOTTOM LINE - a LOT of that debt will be monetized by none other than our Federal Reserve Bank. The result? A bear market in the US Dollar. The consequences? Bull markets in commodities. Also US stocks, particularly those with strong overseas sales.
Now this will not happen overnight. It will take several months to really start playing out. The Fed is absolutely determined (for the time being) to get and keep interest rates low so US banks can have time to reliquify their balance sheets.The US dollar will be what is sacrificed to make it happen.
So I believe the author is essentially correct. Do not rule out the eventual return of bull markets in stocks and commodities.
On Dec 24 08:50 AM patio wrote:
> " Imagine that in 2008 and beyond..the American character is ingrained
> with borrowing and spending and it will manifest itself by a rush
> towards credit that's going to leave many dumbfounded. Balance sheet
> pumping will replace this very temporary balance sheet repairing
> we've seen. This process isn't simply a matter of getting people
> on their feet again... IT'S A MATTER OF SOCIAL STABILITY. Things
> will fall apart and anarchy will rule if not done rapidly. This not
> a society, any longer, that handles NO well. "
>
> This is beyond stupid. With very high unemployment, already high
> debt, and houses already full of discretionary stuff, banks going
> back to sane lending criteria, somehow in your fantasy world the
> seachange demand destruction will magically reverse itself, and violently,
> because why?
> Because you own gold and want it to?
GP sums everything up in one sentence: "Put simply, there has to be ammunition and people have to use it."
I agree that the Ammo is there, so what? This nation is 2/3rds Service driven. Unemployment levels are just starting to hit their stride. The sectors yet to be hit with bankruptcies will continue to feed the need to save.
Experimental Psychology, go back to the basics.
The people of the Great Depression and our current population have a great deal in common. Tremendous wealth loss and looming unemployment coupled with the Psychological pounding provided by the Media 24/7.
Credit Cards usage is down because Debt is being repaid by those able to do so. Others are using Cash or Debit Cards for purchases. People are in Mental Bunkers and will remain there for the foreseeable future.
You can pound the inflation theme all you want and I agree wholeheartedly with the premise. However, your timeline leaves a lot to be desired.
Your explanation of how you believe the future will unfold is also highly suspect.
Sea Change appears to be something to be espoused when it supports a position you have taken ala Mr. Schiff but is totally disregarded as a possibility regarding the spending habits of the American Consumer.
Within the last 10 years the American Consumer has suffered through the wealth loss caused by the Internet Bubble. And then decimated by a composite shock of Home devaluation and another drop in stock prices just as a seeming afterthought. I believe the Madoff news is the final straw.
The Hunkering down process has just begun.
Inflation is nigh!!! What a load of garbage. Deflation Is Here.
I have one Caveat. Inflation can be brought back quickly, but it will have to be imposed by external actions. An oil spike because of a successful terrorist action taken against the Saudi Oil fields for instance.
IMHO
Remember how you Googled me? It works both ways.
Inflation is a near certainty in my opinion. it is easy to see the logic in it's necessity (yes, necessity) if we stop reading into the daily micro-analysis in the papers that leads to total investor confusion about our future.
The basic problem is that US debt levels are simply too high and in fact beyond the point of being paid back. This becomes especially true in times like these as GDP declines, unemployment rises and the Government compromises itself by being forced into reducing taxation in order to stimulate the economy.
The US simply cannot go bankrupt, neither can it pay back all the money it has borrowed and is continuing to borrow. Inflation must be and will be the answer to this dillema. We will only be able to pay down our debts by a massive expansion of the money supply and the inflation that results from this move. Inflation is our salvation in one sense but it will create a great deal of domestic and international pain in the process. There really is no other alternative because the structural pains that result from a depression will not get us out of the hole we are in debt-wise.
In any case, high levels of inflation are a defacto bankruptcy as it allows us to repay our debts with smaller and smaller dollars. But this medicine won't be delivered to the lenders in a wrapping with that tag attached. The worlds financial system will have to eat this one to remain functional and that is why it will be accepted overseas. High levels of inflation are the only real way we can continue to function while we meet our international obligations.
So we need inflation and therefore we will have it. The Fed is driving that point home through massive spending and borrowing that is simply unprecedented. The writing is on the wall. So, yes I do agree there will be inflation despite current deflationary signposts that are distracting us all from the big picture view. The deflation alternative is so ugly and involves so much wealth destruction it cannot be allowed to happen. And it will not happen with the cooperation of our trading partners.
So I favor holding positions in gold and silver and other commodities as a basic insurance policy. It is foolhardy to totally disregard this writers ideas even if they don't all make sense. The outcome will very likely follow his prediction of higher gold prices going forward.
I don't incidentally think that China's plan to buy 4000 tons of gold is any coincidence in light of the big picture trends.
1. The fed (and other central banks) cannot create money fast enough to compensate for its destruction.
- Whilst timing is always an open question, a central bank operating without effective constraint (which seems pretty much to be the position in the US and several other countries at the moment) can create money at will. Mr. Bernanke has, of course, said as much.
2. Velocity will stay subdued because a significant proportion of consumers are already overleveraged and/or unemployed and/or concerned about the prospect of unemployment.
- That these are very real issues cannot be doubted, but to assume they are permanent suggests a culture change of colossal proportions within a space of months. I cannot read the mind of average American consumers from my side of the Atlantic, and from a global perspective it is American consumers that matter most. Here in Britain, I can guarantee that at the first sign of an economic spring the under-40s will be out spending again. (Just yesterday I was talking with a 20-something bank clerk at an institution which failed and had to be nationalised, convinced that the gloom and doom was just media-talk and things really aren't that bad.) The question, as some comments have already pointed out, is whether banks will fuel a rekindled appetite for credit. In this country they most probably don't want to, but we have a government urging them to lend at 2007 levels (i.e., a government whose electoral prospects ride on trying to reflate the Hindenburg - somebody else's metaphor, not mine).
3. Goldilocks lives, insofar as the central banks will be able to turn off the monetary taps at the optimal time to prevent inflation taking hold.
- Personally, I don't have a lot of faith in today's central bankers. But prejudice aside, do we really believe economies can be fine-tuned so easily?
Maybe it's justice European negativity at the winter solstice, but personally I think we're facing an 'either or' situation. I find it tough believing that the guys who let us get into this mess can finesse their way to a 'goldilocks reflation'. Hope I'm wrong.
A terrific article, this one! I happen to believe that we are in for a very difficult time and unlike the Great Depression that has a multitude of differences than this time, trying to compare it to now is just plain silly.
Suffice to say we have a government that is totally controlled by one party, which gives them carte blanche to do whatever they please. And it appears what pleases them is to SPEND the tax-payers $$ at an alarming rate without any thought of what it is doing to US.
Of the many fine posters on this subject, I didn't see one item that has me (and others) very worried. China! China is no longer willing to bail (there's that word again) the Treasury out as it has done in the past, to the tune of 2+BILLION PER DAY!
China has TRILLIONS of worthless green pieces of paper which they want to rid themselves of via replacement with GOLD!
Now, any thinking person can imagine what will happen when that evolution begins, right?
Well, its not too late for us Joe Sixpacks to accumulate physical gold (and silver) to SLOW the coming tsunami.
God Bless you and yours. (Again, if that offends, follow instructions in first paragraph)!
We are in deflation which will last 20 to 40 years as it did before. As debt is eliminated --money disappears like magic. Guess what? people no longer want to borrow but have started saving.
Inflation cant be started during deflation (the govd. wants to but cant). If money is printed and no one borrows against it --it doesnt exist.
CLH is right, so is User30121 and so is Pinelli.
The basic ingredients for inflation are in place. The Psychology isn't yet. People will spend if they believe that the next time they buy an item it will be more expensive. Even if the Dollar drops like a rock, it will take months for other Internationals to adjust prices to reflect the drop. They will not do it in one fell swoop.
Things will get worse before they get better. But one thing is fairly certain. Everything will happen far faster than ever before. CLH's 20-40 years can be 3-4 years. User is right but the interest rate rise will be forced upon us with the Dollars drop, Bernanke will not raise interest rates.
GP has been trying to be right for the past 9 months, eventually he will be. Gold will rise and Silver with it. Silver more so than Gold because it has industrial uses.
IMHO
People today do not like to hear NO. The rest of the article follows from this...
People today are willing to sacrifice and suffer? Not a chance...