When Will Deflation Turn Into Inflation? (And How Quickly?)

1) Investing in Inflation vs. Investing in Deflation
2) The Case for Further Deflation
3) Inflation is Government Made
4) Signals to Watch for a Turning Point
5) Is Kanye West a Jackass?

At the core of our conversations are a few core ideas: risk versus uncertainty when investing with incomplete information; asymmetric payoffs (risk over reward) in a probabilistic world; the intersection of macro and micro at the industry and security level; and investing empirically and rationally while conceding that investing is both art and science.

Also, for business and financial news clips, see here. So from San Francisco and Philadelphia, we welcome you to the conversation.

1) Investing in Inflation vs. Investing in Deflation

The most important view investors need to have is when the current deflationary climate will become inflationary, and to what degree. If you answer this question correctly, you will make investment decisions better than most sophisticated investors. From March through August 2009, US prices have come down on average about 0.4% to 2.10% compared to the previous year, and the CPI-U is down 1.5% for the 12 months ending August 2009. We are clearly going through deflation.

In a deflationary climate, the best investments are cash and fixed income securities, as both increase in value as the value of a dollar increases. For example, if your $100 bond bought 100 loaves or bread before, after a deflationary period it could buy 110 loaves and you are richer. During deflationary periods, real assets like land and commodities generally fall in price. But not in the current climate, where oil went from $35 to $72 per barrel from March till September - so not all real assets have been hit by deflation. Also, generally weaker companies and credits like high yield bonds do poorly as sales drop and credit is tight. Investors are better off holding investment grade government bonds or corporate credits.

In a moderately inflationary climate of 0-3% inflation, a balanced portfolio of stocks, bonds, and real estate does the best in giving solid returns and dampening volatility. From 1982-2007, the US went through a "Great Moderation" period with moderate inflation and decent growth. It had three stock bull markets (1982-1988, 1992-2000, and 2003-2007), two real estate bubbles (1982-1987, 2002-2007), and what appears to be a massive debt bubble (1982-2008) which unraveled in 2008 (George Soros referred to this in Dr. Evil style as a "financial superbubble"). The current deflation is a result of the popping of the superbubble and the deleveraging of the debt underneath, which is a nice way of saying we are digging out the buckets of $**t that propped up the bubble economy that allowed people to buy second and third homes and three SUVs per family with a $60,000/year income.

In a highly inflationary climate of 5-19% inflation, things would be different. Currently, the smartest investors agree on two things:

1. The medicine of monetary and fiscal stimulus used by governments to prevent a Depression in 2008 will likely lead to long run inflation as that is the preferred way of deleveraging (high inflation erodes the value of fixed-rate debt).
2. Inflation is everywhere a man-made, or generally a government-created phenomenon. See Warren Buffett's thoughtful NY Times op-ed, "The Greenback Effect".

The conventional wisdom says that in a highly inflationary environment one should hold commodities, real assets, and equities. We will examine that further. One thing is certain: holding cash and bonds in a highly inflationary climate is foolish and destroys wealth. Hence the optimal portfolio in the current deflationary climate would get slaughtered in a highly inflationary climate. Knowing the turning point is crucial.

Again, to repeat the key questions: When will deflation turn into inflation, and how quickly? How high will the inflation be?

2) The Case for Further Deflation

While the US economy seems to be entering a weak recovery, a strong case exists that deflation or low inflation will continue for 8-16 more months.
First, total US debt levels are still very high historically (above the 1929 levels), at about $49 trillion. One should also add in another $52 trillion for Medicare and Social Security promises. This is about 390-800% of GDP, which is much higher than any other point in US history. Total US debt is outrageously high, at about $340,000 for every American ($101 trillion divided by 300 million people). The net worth of US households, including their houses and after counting debt, was $50,000bn in March, according to the Fed.

Second, the US federal government has the largest projected deficits since WWII, at 9-12% of GDP for the next several years. While Americans are scaling down one war (Iraq) and undecided about another (Afghanistan), the outlook for the US government looks like the US's bellwether state… California. The bankrupt, bloated state. Quite dismal. See Prof. Buiter's analysis on the US federal debt situation.

The high debt levels imply two realities: no new debt and old debt needs to be paid off. This means less lending across the board, less consumption, and more saving (the US’s 71% consumption rate has to fall to between 60-65%). All these forces lead to output slack, a real recession, continuing deleveraging, a much lowered velocity of money, and debt deflation, which the economist Irving Fisher described well after the Great Depression in this 1933 article, “Debt Deflation Theory of Great Depressions.”

The current recession has created enormous "slack", or unused portions in the US economy. Factories are half-used with manufacturing capacity a little above 65%. Millions of housing and office units sit unused, and the U-6 unemployment rate is above 16% in the US (U-6 is the best measure of people who want yet can't get work, unlike the U-3 measure that policymakers and the media use to pacify people, which is also near 10%). Traditionally, 20% or more unemployment is considered a depression, so the US isn't far off (Spain may already have reached it). For more anecdotal evidence on slack, see this front page WSJ article on slack.

If you just use your eyes and look around you, we are still in a recession (defined as deviance from a normal growth trend). Lending and economic activity are at lows, slack is high, and it will take time to get things moving again and create inflation. Walk into restaurants and car dealerships, visit freight railroad terminals. Both your eyes and the numbers show that slack is high. One CEO who is honest about this is Oracle’s (ORCL) Larry Ellison, who predicts an L shaped recovery — “down and not coming back up.” Retail sales are at 2005 levels.

It may take many years to create inflation again if central banks are too skittish and governments prefer more recession to inflation. The best historical analogy would be Japan after a 20 year cycle of debt ending in the1990 debt deflationary bust, or what Richard Koo calls a "balance sheet recession." Japan had 7 years of no/low inflation afterward, and when it started to pick up in 1996 the government tightened monetary policy leading to a 1997 second recession. See more on Koo's work in this review.

Japan avoided inflation because policymakers decided the best way to deal with the bust was greater government spending and no bank reform. So insolvent zombie banks stuck around for 7-8 years, debt was not written off, and inflation never took off. Basically, there was a political decision to benefit government bureaucrats who controlled fiscal purse strings and the creditor classes who wanted neither inflation nor their debt to be written down. Ordinary Japanese citizens and taxpayers paid the bill with their national debt bill rising, their personal debts staying flat with no inflation, and low economic growth leading to stagnant household income growth.

My main point is that the choice between inflation and deflation is a government policy choice. Politicians can choose either to support the lender/creditor class (choose deflation and foreclosures) or workers and the borrower/debtor class (choose high inflation and debt forgiveness). So far, the US government has chosen deflation and massive bailouts to the bondholders of still insolvent banks (Citigroup (C) and others). This bailout, when examined systemically, has cost nearly $23.7 trillion by the estimate of the US special inspector general.

3) Inflation is Government Made

Milton Friedman famously stated, "inflation is always and everywhere a monetary phenomenon." That is, inflation is created by the mandarins who control the money supply: the central bank and the Treasury/finance ministry. In the US, the top mandarins are the FOMC/Ben Bernanke and the White House Team/Tim Geithner.

There has been no extended deflationary period (longer than 3 years) in the US since the 1870-1892 deflation, when the East Coast banking interests controlled Congress and set up a gold standard which caused a slow, two decade deflation. Remember those notes in your US history textbook about farmers, William Jennings Bryan, and the "cross of gold"? You might want to dig those out or otherwise check out Barry Eichengreen's excellent monograph, "Globalizing Capital."

Here's how Ben Funnell of the hedge fund GLG Partners recently laid out the options in an FT op-ed:

The debt burden has to come down, which means more saving and lower economic growth for many years to come. Along the way inflation is likely to return, probably sooner and more violently than most expect, which will prompt investors to demand a higher return and make it even harder for governments to tackle the debt. At best the debt will fall slowly over many cycles and simply trim otherwise resilient growth. At worst it could cause growth to lurch upwards before tumbling again, with all the attendant uncertainty that entails. At this point, no one can know which is more likely. I incline to the more benign view because of the size of household assets but, if the dollar’s reserve currency status should come under serious attack, rates would have to rise to defend it and that could itself cause a consumption crisis.

Most politicians and their constituents personally fall in the debtor class, though the biggest campaign contributors are all from the creditor class. The responsible action for politicians would be to create moderate inflation, about 5-7%, as the Harvard economist Kenneth Rogoff has suggested. That way, fixed- rate debt would halve its real value in about 12 years. Yet the genie of inflation, once let out of its bottle, is very hard to contain or get rid of. Some would argue that the seeds of inflation are already laid as the US government "monetizes" Treasury debt in an elaborate shill game. This happens as the Fed buys US mortgage debt from foreign central banks by printing money, and the foreign central banks use that money to buy US Treasury bonds:

Eventually Bernanke and Geithner will heed Rogoff's sensible suggestion and set a 6% or more inflation target, either openly or furtively. Yet inflation will go beyond that because it is a messy human and sociological phenomenon which can't be tweaked scientifically with a dials and counters from a central bank's control room. Also, there's just too much debt and I don't expect debtors will wait 12 years for their debt to be halved (Americans want instant forgiveness).

4) Signals to Watch for a Turning Point

We will spend much more time dissecting signals in the future. In short, we believe the following are some signals on when deflation will turn into inflation are:

• Total bank lending and consumer credit
• US Fed aggregate reserves and the velocity of money
• Unemployment rate and employment claims
• Commodity prices (oil, gold, metals, agricultural stock, etc.) and the Baltic Dry Good Index
• Industrial capacity and the ISM index
• Freight car loadings, car sales, and retail sales
• Pricing of options on US Treasury rates (especially volatility prices, like Move), the breakeven rate, and 30-year fixed-rate mortgage rates
• Actual observable prices in department stores and grocery stores (these help to set inflation expectations)

By the time inflation comes and registers on the CPI, it will be too late to re-position your portfolio or hedge for it. That's why the signals above are important.

5) Is Kanye West a Jackass?
This month at the MTV Video Music Awards, the rapper Kanye West jumped on stage, crashed Taylor Swift's speech, and declared that her award ought to have gone to Beyonce.

Later, in an off-the-record interview, President Obama called Kanye West a "jackass" for his behavior, and an ABC News tweeter released this private comment to the world.

Jay Leno then put Kanye on TV and got Kanye to cry by asking him, "What would your mother think of this?" (Kanye's mother had died recently).

The debate on whether Kanye was a jackass and whether Obama should have criticized him has consumed much more press and American attention time than the legitimate and very important policy and national interest question that Prof. Rogoff asked:

How high should inflation be to get us out of this mess?

Your analyst who loves to hate the trashiness of American media,

Disclaimer: We may also occasionally publish opinions about securities, but these are not investment recommendations. In all things investing, we encourage you to think for yourself and make your own decisions, or find someone trustworthy to act on your behalf.

Comments

[Gary A:]

Credit expansion will not drive a recovery, only cash power. Therefore, while there may be a little help for mortgage holders by inflating, a strong dollar would help those folks even more, with lower prices across the board. Don't be fooled, inflation robs the average Joe.

When will savings and thrift and noble traits be rewarded again? Another bubble will not lead to a strong nation.

Oct 09 04:37 PM

[Jimbo:]

Yes, West is a jackass but so is almost everyone else in the "entertainment" industry. Look at David Letterman for the most recent example. As for the lesser issue: Stagflation will be our fate. Economic stagnation domestically with a cheapened dollar costing us more for such things as oil, since we are forbidden to produce our own from domestic sources.

Oct 09 04:49 PM

[Plant the s...:]

What has been interesting to watch is the jump in commodity prices in a deflationary environment??

Oct 09 05:06 PM

[ryanclarke:]

It's over. AS IN GAME OVER! The world has "defended" the dollar this week. What that means is the Asia-Pacific, European, and South American countries have chosen not to allow their currency to appreciate relative to the dollar. Bernake's game plan for the past year was simple ... keep the GREENSPAN inflation tactic working ... depress the 10 year T-Bill all the way to a 2% Yield or even better 1%, so all good U.S. citizens could draw more equity, (dare I say blood?), out of their homes ... and go out and shop and consume until they drop ... because Bernake is determined to save the banks and the Fed via reflating the housing market. Instead, the world turned around and spit the 10 year Treasury out of their respective central bank coffers, (dare I say, coffins?), and out onto the open market and soaked up the dollar bills into their reserve banks ... Bernake was so hoping they'd allow the dollar to get into their econonomies and jack up oil prices sky high ... not that the middle east or Russia or the Euro nations or Mexico could profit like Goldman or Morgan from high oil prices. Now the open market is sitting on a bundle of 10 year U.S. treasuries which is why the yield on the 10 year leaped up today over 100 basis points. Bernake's going to have to quietly buy those 10 year notes back ... or the inflation will be obvious ... until the Fed publishes the money balance of their balance sheet... which the Fed is required to do by law ... showing an increase and not a decrease in money supply. So here is the final story. Everything the Fed has tried to do for the past year was a waste of time. The Fed has bought all the junk mortgage paper from every bank all over the globe and given them U.S. treasuries. That's what's on the Fed's books ... tons of worthless mortgage paper. The Fed will soon be sitting on a ton of treasury bills that no one ... the whole world over ... wants to touch ... and the U.S. banks have tons of money cash called dollars they are not supposed to lend according to Bernake. But the central banks in other countries can not do to the dollar what they please. What to do, Bernake? What to do? I SUGGEST HE TAKE THE CASH AWAY FROM THE U.S. BANKS AND GIVE THEM THE OVERPRICED BONDS so all the mortgage paper on the Fed's books can be wiped out ... dollar for dollar ... because if he doesn't do that ... THE DOLLAR WILL BE WORTHLESS !!!!!!!!!!!!!!!!!!! Because Bernake no longer has control of his printing press ... he just gave that power to the foreign central banks of Asia, Europe, and Latin America.

Oct 09 06:26 PM

[a fat panda:]

The big deflation drivers are on the supply side. Input costs are coming down, wages, rents, and the like. Also there is no pricing power in the system. There are too many people will to discount to keep market share. Inputs will level off at some point, and excess businesses will close. At that point, we will have wicked inflation.

Oct 09 10:39 PM

[change is t...:]

First and least importantly Kanye West is a Jackass, however, if he recently lost his mother, he is a forgivable one. Anyone who has lost a parent knows it takes a while to get over a loss so profound. You are not normal for a while. I didn't know he had lost his mother, that makes a huge difference.

Second, I am going to out on a limb and say don't bother with any updates on when deflation has turned into inflation. By the time you see the data, it will be too late to invest accordingly. The guys (and gals) who bet before the data is visible will have already made the money you are going to advise others to chase.

Last and most importantly the East Coast Bank Cartel causing a couple of decades worth of deflation is very useful history. Thanks for enlightening.

Oct 10 09:17 AM

[Michael Clark:]

Gary: You say Bernanke KNOWS this is robbery of the poor. But does he CARE?


On Oct 09 01:42 PM Gary A wrote:

> The US consumer cannot afford inflation. While Geithner and Summers
> don't care, Bernanke knows this is robbery of a consumer who is less
> resilient than the consumer was in the 70's. This consumer cannot
> afford 5 dollar gas. We are Japan, and we better stay that way because
> inflation will make us worse than Japan.

Oct 10 12:34 PM

[Michael Clark:]

I must say, this is the most interesting post I've read in some time. You are saying foreign support of the dollar will destroy Bernanke's plan. Is Bernanke unable to influence foreign central banks from doing this? I can see that the weak dollar is destroying foreign exports to America -- and there really can't be a global trade recovery without a stronger US Dollar. Is that why they are supporting the dollar (along with fear that all the US debt they are holding will become useless)?

Very interesting post.


On Oct 09 06:26 PM ryanclarke wrote:

> It's over. AS IN GAME OVER! The world has "defended" the dollar this
> week. What that means is the Asia-Pacific, European, and South American
> countries have chosen not to allow their currency to appreciate relative
> to the dollar. Bernake's game plan for the past year was simple ...
> keep the GREENSPAN inflation tactic working ... depress the 10 year
> T-Bill all the way to a 2% Yield or even better 1%, so all good U.S.
> citizens could draw more equity, (dare I say blood?), out of their
> homes ... and go out and shop and consume until they drop ... because
> Bernake is determined to save the banks and the Fed via reflating
> the housing market. Instead, the world turned around and spit the
> 10 year Treasury out of their respective central bank coffers, (dare
> I say, coffins?), and out onto the open market and soaked up the
> dollar bills into their reserve banks ... Bernake was so hoping they'd
> allow the dollar to get into their econonomies and jack up oil prices
> sky high ... not that the middle east or Russia or the Euro nations
> or Mexico could profit like Goldman or Morgan from high oil prices.
> Now the open market is sitting on a bundle of 10 year U.S. treasuries
> which is why the yield on the 10 year leaped up today over 100 basis
> points. Bernake's going to have to quietly buy those 10 year notes
> back ... or the inflation will be obvious ... until the Fed publishes
> the money balance of their balance sheet... which the Fed is required
> to do by law ... showing an increase and not a decrease in money
> supply. So here is the final story. Everything the Fed has tried
> to do for the past year was a waste of time. The Fed has bought all
> the junk mortgage paper from every bank all over the globe and given
> them U.S. treasuries. That's what's on the Fed's books ... tons of
> worthless mortgage paper. The Fed will soon be sitting on a ton of
> treasury bills that no one ... the whole world over ... wants to
> touch ... and the U.S. banks have tons of money cash called dollars
> they are not supposed to lend according to Bernake. But the central
> banks in other countries can not do to the dollar what they please.
> What to do, Bernake? What to do? I SUGGEST HE TAKE THE CASH AWAY
> FROM THE U.S. BANKS AND GIVE THEM THE OVERPRICED BONDS so all the
> mortgage paper on the Fed's books can be wiped out ... dollar for
> dollar ... because if he doesn't do that ... THE DOLLAR WILL BE WORTHLESS
> !!!!!!!!!!!!!!!!!!! Because Bernake no longer has control of his
> printing press ... he just gave that power to the foreign central
> banks of Asia, Europe, and Latin America.

Oct 10 12:41 PM

[Plan B Econ...:]

Where did you see 10yr treasury yields rise 100 basis points?


On Oct 09 06:26 PM ryanclarke wrote:

> It's over. AS IN GAME OVER! The world has "defended" the dollar this
> week. What that means is the Asia-Pacific, European, and South American
> countries have chosen not to allow their currency to appreciate relative
> to the dollar. Bernake's game plan for the past year was simple ...
> keep the GREENSPAN inflation tactic working ... depress the 10 year
> T-Bill all the way to a 2% Yield or even better 1%, so all good U.S.
> citizens could draw more equity, (dare I say blood?), out of their
> homes ... and go out and shop and consume until they drop ... because
> Bernake is determined to save the banks and the Fed via reflating
> the housing market. Instead, the world turned around and spit the
> 10 year Treasury out of their respective central bank coffers, (dare
> I say, coffins?), and out onto the open market and soaked up the
> dollar bills into their reserve banks ... Bernake was so hoping they'd
> allow the dollar to get into their econonomies and jack up oil prices
> sky high ... not that the middle east or Russia or the Euro nations
> or Mexico could profit like Goldman or Morgan from high oil prices.
> Now the open market is sitting on a bundle of 10 year U.S. treasuries
> which is why the yield on the 10 year leaped up today over 100 basis
> points. Bernake's going to have to quietly buy those 10 year notes
> back ... or the inflation will be obvious ... until the Fed publishes
> the money balance of their balance sheet... which the Fed is required
> to do by law ... showing an increase and not a decrease in money
> supply. So here is the final story. Everything the Fed has tried
> to do for the past year was a waste of time. The Fed has bought all
> the junk mortgage paper from every bank all over the globe and given
> them U.S. treasuries. That's what's on the Fed's books ... tons of
> worthless mortgage paper. The Fed will soon be sitting on a ton of
> treasury bills that no one ... the whole world over ... wants to
> touch ... and the U.S. banks have tons of money cash called dollars
> they are not supposed to lend according to Bernake. But the central
> banks in other countries can not do to the dollar what they please.
> What to do, Bernake? What to do? I SUGGEST HE TAKE THE CASH AWAY
> FROM THE U.S. BANKS AND GIVE THEM THE OVERPRICED BONDS so all the
> mortgage paper on the Fed's books can be wiped out ... dollar for
> dollar ... because if he doesn't do that ... THE DOLLAR WILL BE WORTHLESS
> !!!!!!!!!!!!!!!!!!! Because Bernake no longer has control of his
> printing press ... he just gave that power to the foreign central
> banks of Asia, Europe, and Latin America.

Oct 10 12:56 PM

[mws:]

"When Will Deflation Turn Into Inflation? (And How Quickly?)

With all do respect to Kanye West, Ben Bernake, Alan Greenspan, David Letterman, Treasury auctions, Cash4Clunkers, the dreaded, "This time it's different," gifts, thefts, China, Japan, foreign central banks of Asia, Europe, and Latin America, and all else, wasn't the original question, "When Will Deflation Turn Into Inflation? (And How Quickly)?"

If so, and adhering to the K.I.S.S. principle, my guesstimate is "2014." There... I said it (with no expectations of being "right on the money").

Disclaimer: To answer the author's question, I must first buy into the premise that there will be "inflation" (which I do believe) and secondly declare a specific time frame (which I just did). Do I really think I'll be correct? Stay tuned... unless "this time it's different." :)

Oct 10 01:49 PM

[Michael Clark:]

Many of us were piping up some time ago about inflation. Rates should have begun to rise in 2000/2001. But that wasn't an option in a Fed being governed by the Ever-Inflation Leadership. Maybe, as a society, we should not want 'lower taxes and more stuff' for ever.

Is your argument that we should continue to live beyond our means for ever and ever -- and just push up asset bubbles as far as we can ad infinitum?

I'm not sure this decision is really up to human reason. History has ways of forcing humans to 'eat dirt' even when they would rather not. Deflation is God's way (that is, 'the law of Nature', the 'laws of physics) of punishing a people who have inflated too long and too much.


On Oct 09 02:41 PM Crocodilian wrote:

>
> On Oct 09 02:10 PM Jim Dwyer wrote:

Oct 10 02:19 PM

[AllStreets:]

That's a very well-written, faxcinating article with braod vision of the economic landscape. But have the stock and commodity markets already discounted, possibly over-discounted, the inflation expected in the intermediate term? Actually, much consumer goods inflation has already happened, even as leveraged assets have deflated, notwithstanding the official CPI numbers. During the mild CPI "deflation" of the last year the bread I buy went from $1.39 to $1.99 per loaf, up 43%, cheddar cheese from $2.99/lb to $4.99/lb, up 33%, milk from $1.89 to $2.89/gal, up 53%, round steak from $1.99/lb to $3.99, up 50%, gasoline $1.89/gal at the low to $2.39 up 26%. Consumer price index down 2%???...what a bad joke. It's probably due to the ginned up numbers for housing costs. Meanwhile housing values down 30%, consumer income up nothing or cancelled and stock market about flat.

The middle class has been crushed by the asset deflation, and will be further crushed by continuing monetary inflation already showing up in consumer goods. Furthermore, residential mortgage lenders and real estate investors won't be helped for a long time by monetary inflation because the rules and environment for getting mortgages have changed drastically for the worse. Systemic monetary inflation won't save the day for the consumer asset, or at least not quickly enough. The next immediate phase of the crisis is that a large portion of the 16% who are under/unemployed will file for bankruptcy and be foreclosed as income and savings can't pay the bills and unemployment benefits and savings run out but credit card or home equity loans are unavailable. That could lead to even worse housing prices and economy. There's lots more debt liquidation by one means or another in store. That might mean a severe correction in stock and commodity prices at some point before resuming a long term uptrend.

Consumer goods inflation might continue gradully, but asset inflation and more accelerated goods inflation won't resume in earnest until surviving banks see that the worst of the debt liquidation is over, the writeoffs have been taken mostly and enough economic growth has resumed to make it less risky to make higher yielding private loans instead of sitting on Treasury securities, and thus the money supply will begin to expand relentlessly...maybe starting in a couple years at the earliest...free reserves are off the charts.

The only way I can think of that a significant portion of distressed consumers could survive the process now unfolding would be for the U.S. government to soon make low-interest long-term loans directly to consumers to pay off a significant portion of more burdensome debts such as excess mortgage debt, regardless of their employment status. But that won't happen, no popular support. ALL the government assistance is going to keep AIG and insolvent banks in business while they live on taxpayer funds via interest on T-securities and stock market profits. It's too bad because that would save both the lenders and the borrowers together. Unfortunately the government has chosen to save the lender/investor/campai... class only, with nothing for individual consumers (oh, sorry, I forgot the $600 or so special tax rebate). As millions of consumers go down the tubes the political process is going to be interesting to watch.

Oct 10 03:46 PM

[theboyplunger:]

The price action in the precious metals this week tells me that Mr. Market does indeed smell inflation. Considering how small these markets are relative to equities, I believe we are at the very early stage of the next super bubble, particularly in silver. There simply is not enough precious metal to protect all the FIAT money.

Oct 10 08:12 PM

[theboyplunger:]

Hopefully the endgame of the current situation will lead to a breaking point with the american public where irresponsible monetary and fiscal policy is no longer tolerated.

Oct 10 08:21 PM

[dcb:]

On a trade weighted basis the dollar is back to wear it was before the crisis. Shortly before that it was at historic lows. As it keeps dropping we are going to have inflation. in 6 months the dollar buys 11% less on a trade weighted basis. As far as I am concerned that is the same to me as 11% inflation. I care little for year over year measurements esp as just a short while ago oil as at an all time high. to compare outlier prices is a sham. We are in an overall inflationary cycle that brought us a small window of deflation. It is over and has been over for months. the market can do what it wants, but it would have turned inflationary well before if Bill Gross hadn't lined up behind the treasury to buy treasuries. That action was simply traders/ banks doing what they always do (which is pusing prices to the extreme) before making the turn. Wall street was also incentivized to do the trade as is allows them to unload excess housing at lower interest rates and maintain the false value of their housing inventory. We are aslo giving banks unlimited free money to buy treasuries so they can help themselves by keeping long term rates artificially low.

Inflation never went away, just the price of increases has slown. I have asked at least 30 people lately about their personal experiences with inflation and not one has said they are going down. The governement has told us before we weren't having inflation when everyone knew it was there. Why should this be any different. Inflation serves the interest of the banksters and our government a bit too much for the to be honest it. Take a look at DBA. we lost 10 years of stock earnings and this dropped two years at most. That isn't real deflation after a historic run of inflation by any means. Talk to me when prices get back to where they were five years ago and I'l say we are having deflation. (only housing).

You can't have deflation in an ever dropping currency, and the dollar fundamantals says it is going to keep heading down for a long time on a long term basis. Just the same way it has been happening for the past decade or so.

Oct 10 11:53 PM

[dcb:]

Because our Fed was so great they were the first to lower interest rates and in theory were were therfore going to be leading the recovery and therefore we would be early raisers. Well we knw that isn't happening. I will be you almost anything we be the alst to raise as we have the most structural issues to overcome and instead of dealing with those difficult issues we will just ensure the fed kills the dollar. This has been the clear long term plan for so long now I can't even talk about it.

Oct 11 12:02 AM

[Think-About-It:]

Deflation is friend, not foe. What is that saying about every man being a product of his times? Anyway, although most of us (especially on Seeking Alpha) view ourselves as independent thinkers most of us have been conditioned to accept modest inflation as good or even ideal and deflation as bad.

Our Keynesian economist and political leaders have hammered this message home for so long that we have come to accept it either intellectually or subconsciously. I cringe every time I read/hear someone say that deflation must be avoided as it hurts our economy or say that deflation was one of the "causes" or "problems" of the great depression.

Please read up on your Austrian Economics to fully grasp how falling prices are the by-product of a healthy, growing vibrant economy when the currency is not debased. I'm not talking about price collapses that occur when asset bubbles burst as we are experiencing in housing. That is not deflation of the general price level brought on by higher productivity, it is just the correction of a speculative bubble-price.

Once you understand and accept deflation as a good and desirable outcome of human achievement over time (think about how much more efficient we are in almost every area of life) I believe you will see higher prices for what they really are -- the result of government interference and manipulation and a back-door tax on the working class. And see central bankers, treasurers and politically connected financial institutions for what they are -- the primary beneficiaries of inflationary policies.

Our founding fathers (having just experienced the ravages of inflation and understanding the source) feared giving future politicians the ability to debase our currency and therefore stipulated in our constitution that only gold and silver could be money/legal tender. They knew what they were doing. Their thinking is not out-dated in today's high-tech global world, in fact, it is prescient.

Oct 11 03:27 AM

[Kinetics63:]

Man do I love seeing all the differences of opinion in these comments; it's what makes scalping so easy!

Personally I am in the deflationary camp and will have to see a considerable increase in the 'velocity of money' part of the equation before I change my mind. With that said, it doesn't matter what I think because all I do is trade the 'noise' I am reading above. :)

Oct 11 04:39 AM

[Ponchovilla:]

Vega:
A well written article on controversial subject. First, there's a definition problem. Second, there's an emotional problem (confirmation bias) and outright bias depending on your point of view.Third, every measuring stick comes with defects as in CPI, Unemployment, Prices, Money Supply, Velocity of Money. The best bet is that you can bet on the direction (until it changes) of the market or financial instruments. Is the stock market and the Economy tightly correlated? Does the market predict the future or just instantaneous prices? Is anecdotal evidence useful? Can an economist do anything but tell you what happened three months ago at best and still confirm disagreement?

If you can answer these questions bet your money, write a book and newsletter and reveal your secrets at $3500 per subscription.

Oct 13 04:45 AM

[Carlos Lam:]

On Oct 09 01:59 PM Crocodilian wrote:

> So my guess (and that of the currency markets) is that we'll end
> up over the next few years with a nominal price rise of %20-30 in
> excess of base inflation. Although there's a great deal of hand wringing
> over this, the alternative, a deflationary depression, is far worse.

Disagree. When a currency drops in purchasing power, those who save are punished, while those who took on debt are rewarded. You seem to want to reward those who were irresponsible and took on too much debt, but such a "windfall" merely serves to create moral hazard where debt is favored.

Oct 14 05:40 AM