Why Everyone Is Wrong About the Inflation/Deflation Debate

Let's face the facts about the inflation/deflation debate:

1 - No one really knows or can possibly know what the "endgame" will be ...

2 - The goal for investors is to be "future independent" as much as possible: a strategy that wins in nearly any market.

Consider the real issues facing the authorities right now:

1 - If they allow significant price deflation banks could fail in great numbers, and then they may be forced to really monetize which could ignite hyperinflation

2 - If they push in significant price inflation, the currency will collapse, and they may be forced to really deflate to bring back confidence (the "austerity" plans)

In sum, the Fed is facing a cliff on both sides of the path. They will try and stay in the middle.

That means the Fed will end up oscillating policy between price inflation and deflation with a bias toward whichever risk (U.S. government creditors or the banking system) they perceive as the greater.

Now consider the dollar. It is bad, except:

1 - Everyone else is in real trouble and in more trouble than the U.S. !

2 - The Euro is the only substitute in tradeable size against the dollar, and Europe is in real trouble!

The financial elite hold far more wealth in financial dollar assets than they possibly can hold in real goods. How are they going to hedge the risk that things might get out of hand if the dollar "must" devalue?

Let's get a quick answer.

You might note that savvy market players, with the help of the central banks, can push markets to extremes and this helps the nimble set up to benefit from the other side (sell high, buy low).

Consider the fact that, in 1998, the real estate tax exclusion was quietly passed and the Fed subsequently allowed huge increases in mortgage credit.

Now, what is the one market, that recently was busted, that can take the kind of money flows that the big boys have stored in financial assets? After all we are talking trillions ...

Hmmmmm.

In other words, the big boys can prepare for the risk of devaluation by buying cheap real estate and stocks of banks "that will survive" at near dirt cheap prices. This offsets the risk that things get out of hand (necessitating rapid price inflation) before (if) a global currency is introduced. If a solid global currency is introduced, then, in my view, the dollar is really toast.

So how to invest?

1 - Buy gold. It will benefit from a collapse in assets and from devaluation. Note that the dollar price of gold has almost nothing to do with "price inflation" and "price deflation" (convince yourself of this by noting the huge fall in the price as inflation continued for decades). It is more sensitive to whether there is a solid foundation under dollar assets - and the foundation can be broken by either a higher risk of price inflation or price deflation.

2 - Hold cash.

3 - Determine when your income is (1) price inflation advantaged or (2) price inflation disadvantaged or (3) price deflation advantaged or (4) price deflation disadvantaged.

For earners in industries that are doing well in price inflation and price deflation, hold medium amounts of real estate debt. Since income tends to hold steady, price deflation means other expenses drop and the debt is affordable; if there's price inflation there's an increase in income allowing a real return. This can take the place of some gold investment.

For any other combination, lean toward more cash, severely limit use of debt, build up a cushion, gain alternative income sources, and put some money in gold or alternatives like gold that are not someone's liability. While you may decide to bet on one side of the market, the premise here is that it is difficult to know the outcome.

4 - Keep in mind that the authorities face real trouble with both price inflation and price deflation, so they may administer "survival" (they already have) and let some financial institutions fail which will curtail the price inflation effects when giving out lifelines financed with printed money.

5 - Remember, the purpose of the Fed is to benefit the banks and elite finance. They do that by providing a market for treasuries so that Congress can overspend. But now that the Fed can issue it's own perpetual debt (paying interest on reserves!) the next step is to insulate themselves from U.S. government control and U.S. government insolvency.

6 - Remember, the most logical outcome is oscillation of price inflation and price deflation. When one seems to be reigning, operate with the other side in mind. In other words, during high and slowing inflation (indicating a peak), accumulate cash invested in shorter term assets in preparation for price disinflation. During price deflation, pick up bargains. Worst case, you will likely do better than those that believe the trend will be in one direction.

Good luck investing.

Disclosure: Author holds a position in Gold ETFs.

Comments

[writejesse:]

we are already seeing ominous signs of inflation here and there:
inflationwatch.wordpre.../

The Fed will of course try to steer the middle course, but once the inflation genie is out of the bottle, it is VERY hard to control. It is highly unlikely that the Fed will implement a Volcker-like tightening prior to the 2012 election.

Oct 15 07:17 AM

[chap08:]

If everyone is wrong, would that include you too Jim? I think this is a good article and you have a number of things right, but I disagree with you on gold. You note "the huge fall in the price as inflation continued for decades". What you are talking about is a period of declining inflation (from the start of Volcker's medicine and then thru the 90s). Inflation fears disappeared. That's why gold fell. It went from a period of inflation panic to one where inflation risks were forgotten. Gold turned upward again when commodity prices and inflation fears returned in this decade.

In your theory, the gold price depends on a "solid foundation under dollar assets - and the foundation can be broken by either a higher risk of price inflation or price deflation". If that was the case, then gold would have raced up when doubts about the "solid foundation" and deflation fears came to the fore last year right?? Wrong, gold fell ~30% and bottomed at the peak of the panic. Equally, gold would have sold off as confidence in the "solid foundation" returned this year, right?? Wrong, gold has rallied ~45%.

Gold is where it is because we have policies that lead to a weak dollar and inflation. If we turn back towards deflation and get a dollar rally, then gold will do what it did last time and sell off 30%.

Oct 15 08:17 AM

[Carlos Lam:]

This statement by the author is incorrect:

---------
1 - No one really knows or can possibly know what the "endgame" will be ...
---------

All fiat currencies eventually return to their true value: zero. Eventually, the dollar will fall. It probably will not occur for decades, but a wise person will position his assets to deal with such an eventuality. Indeed, the warning signs are evident:

* gold surging to new nominal highs
* oil at $72/barrel even though the economy is on its knees
* the dollar falling against major foreign currencies

Knowing that the signs of devaluation/depreciation are evident, the wise investor will try to move out of the dollar as much as possible.

Oct 15 08:48 AM

[The Geoffster:]

"1 - No one really knows or can possibly know what the "endgame" will be ...
In sum, the Fed is facing a cliff on both sides of the path. They will try and stay in the middle."
Good article, but I think you know the Fed can't control the outcome. They are trying to navigate a row boat in a hurricane.

Oct 15 09:09 AM

[pdtor:]

Well written article, however you might want to include the case for stagflation like the 70's, with rising commodities and gold, and deflation as as far as earnings and salaries.Then we will see where Obama's policies lead us. The most expansionist spending president.

Oct 15 09:20 AM

[manya05:]

OK, the Fed is walking a narrow path between two cliffs. What's you bet? will they keep walking and reach the other side safely? or will they fall off one of the cliffs? You seem to assume the former, I think the latter. So now bet within a bet: which cliff? right or left?

Oct 15 10:24 AM

[TK5656:]

I appreciate this article and understand its macro aspects. The following quotation is the "money" in the article, but is too theoretical for my feeble brain. Try to be more concrete. Here's the quote:

"For earners in industries that are doing well in price inflation and price deflation, hold medium amounts of real estate debt. Since income tends to hold steady, price deflation means other expenses drop and the debt is affordable; if there's price inflation there's an increase in income allowing a real return."

What are you saying?

Oct 15 10:26 AM

[ArtfulDodger:]

JB, a theoretical but thinking article for sure. Some good advice here and there. Complicated but good.

I fear stagflation more than anything.

Our problem is one thing and one thing only, and it's not going to change: the issuing of paper money backed by nothing but bovine scatology.

Although most other nations are doing the same thing, the US is outdoing them all, and that can lead to nothing but disaster.

Thank you for your work.

Oct 15 11:13 AM

[TCK:]

The biggest problem comes from the people in government who think that inflation is good thing. Perhaps for this true for debtors and borrowers, but no on else.

Also, the amount of misinformation being spewed. I actually heard a commentator on CNBC say, "Deflation caused the Great Depression"

While I am not an economic genius, seems to me that is exactly backwards. And these are people setting our economic policy ?

Oct 15 11:33 AM

[Tack:]

No, the dollar won't "collapse" because, unlike almost all previous inflationary periods, our peers have been busy printing money, too, which constrains just how far the dollar can decline on a relative basis, at least vis a vis currencies. What can happen, however, is that the price of hard assets increases for all currency printers, through the immutable laws of supply and demand.

The Fed will not contain inflation altogether because governments always err to the side of supply, rather than constraint (1930's excepted, and we see how well that worked), so prepare for a permanently greater money supply and rising prices.

What remains the typical historical pattern, virtually throughout fiat-currency history, is that inflation is a constant, with temporary lulls, and the price of virtually everything ascends over time. Suggesting that this trend of human events will be broken is akin to suggesting that the tide will not come in.

Oct 15 11:36 AM

[Alan Young:]

"Buy gold. It will benefit from a collapse in assets..." Funny, I seem to recall a collapse in assets just a year ago, and it did not benefit gold.

I agree that it is prudent to start with the assumption that we can't know which of the risks is going to get us next. But gold is not the solution to most of them.

Oct 15 11:38 AM

[ryanclarke:]

Remember, no national currency is "backed" by gold. They are all fiat. When the Fed chose to inflate their way out of this pickle ... they chose to inflate EVERYTHING. If you note the major indexes are roughly about where they were before Lehman went belly up ... oil is at $75 , gold is at $1000, S&P is at 1100, 10 Year T Bill at 4%. The one major difference is the DOLLAR. Because Bernake has of yet to let up on the money printing pedal the DOLLAR is weakening unlike last fall when the USD was strengthening! THIS IS CRITICAL to understanding the problem Bernake faces with the 0% free money policy he wants to continue. HE CAN'T FOR LONG. Just when the U.S. economy is showing signs of rebounding ... jobs aren't falling off a cliff ... but now everyone is driving around looking for work !!!!!! With gasoline demand strongly above 9 MBPD and ever dwindling gasoline stockpiles the U.S. faces in every way the repeat of a fall 2007 event. Also, the yield on the 10 year is moving up ... not down. Bernake was hoping he could buy some long term bonds and get the yield down so everyone in the U.S. could refinance and thus continue to shop and consume. BUT IF THE FED DOESN'T DEFEND THE DOLLAR SOON gasoline prices should put a real downer in consumer mentality about the economy. That's why deflation is the most likely outcome ... because all across the world no consumer is able to cope with ever increasing energy costs. The global consumer will break down before global oil output breaks up.

Oct 15 11:39 AM

[Beach Bubba:]

I think, few people can actually remember the price they paid for items at the grocery store one year, two years, ....five years back, etc. That is, loaf of bread, pound of butter, box of oatmeal, rib eye, etc. I think these things are not included in the CPI. Inflation is rampant on main street. I don't put much creedence in the things people spout; I look at he grocery receipt and buy silver coin (and some gold shares). I buy and hold enough so that the increases in grocery and cost of living prices in general are covered by the increase in the Ag/Au price that I own. It works for me. It will work for you, too.

Also, I have moved to a third world country where the quality of daily life (and food) far exceeds that of my homeland.

Oct 15 12:05 PM

[Solon:]

The US could always go for a double currency as it has done before. Let's see...double the value of gold overnight and make it illegal to hold gold.
There, that'll do it.

Oct 15 12:35 PM

[SeekingTruth:]

Inflation and deflation have indeed fluctuated/oscillated throughout history.
As a result, I much prefer a flexible seven asset class allocation which is adjusted over time with changing conditions. Some selections , like real estate may have 0% allocation at any given time while International stocks/bonds may have a full allocation. I own the Permanent Portfolio Fund to help me do this but with only a suitably small portion of my funds.
From time to time I am a little early or late with my adjustments , but I have the satisfaction of knowing that I am doing my best in keeping my overall portfolio above water and reducing risk at the same time.
I avoid rigidity and always try to use sound logic and rational to make my adjustments.
I also assess my financial needs over the next two years and will sell stocks, etc. early to meet them even if I think the asset class is going up, because, after all , anything can happen at any time.
This will not work for everyone, but it works to my satisfaction.
Thanks for your helpful and relevant article.

Oct 15 12:54 PM

[TwiceShy:]

Right now, inflation seems at the forefront in the minds of nearly everyone, which leaves me to wonder:
Are YOU ready for another Black Monday?

Oct 15 01:37 PM

[WS1835:]

Personally, I am not sure what the author is trying to say in a number of places. Here is my observation.

Unlike one of the above comments, I actually have tracked the price of a selected number of grocery items over the last two years. A little game of mine, my own personal CPI index. I have observed the following in terms of shelf price per unit:

Beef, pork, and cheese are as cheap, or cheaper, than two years ago. (My favorite tracking item is the generic 2-lb block of mild cheddar) Paper products, ice cream, and canned tuna have risen. (Notably, the price stayed the same, the package got smaller. A classic trick last seen in the 70's.) Eggs, milk, pasta, and bread haven't changed much at all. (Milk and wheat are regulated commodities so I didn't expect to see much of a change.) So based on shelf price, I have seen both inflation and deflation. Overall, inflation seems to be winning since my weekly grocery bill is slowly rising for the same general basket of goods.

However, one important caveat. If one acknowledges a significant decline in the value of a dollar over the course of the last year, then any shelf price the stayed the same was actually deflation.

If I have to make a prediction, I vote stagflation. All the basic elements are already in place (long term decline in purchasing power and real income, a flat economy, and a weak currency).

Oct 15 01:38 PM

[Alphameister:]

I believe that stagflation is the best of possible outcomes as the Fed tries to steer between Scylla and Charybdis. In normal times, the Fed would like to control inflation to 2% or less. In the current environment, I'm guessing the Fed is seeking inflation in the range of 3% to 5% to provide a cushion against the terrifying specter of deflation while also serving to erode gradually the magnitude of our debt burdens. Meanwhile, I can't see real economic growth averaging more than about 2% as consumers and companies gradually de-leverage their balance sheets. The US faces very high unermplyment and severe obstacles to growth for as far as the mind's eye can see.

Oct 15 02:11 PM

[Michael Clark:]

Everyone in wrong? How can everyone be wrong? Some say tomato, some say tomatoe...? Some say deflation, some say inflation...some stay stagflation. Someone is bound to be correct. This item:

5 - Remember, the purpose of the Fed is to benefit the banks and elite finance. They do that by providing a market for treasuries so that Congress can overspend. But now that the Fed can issue it's own perpetual debt (paying interest on reserves!) the next step is to insulate themselves from U.S. government control and U.S. government insolvency.

This is a bit scary. 'Insulate themselves from US government control'...who the hell are they? Is this a tumor that has attached itself to America and is sucking all the white blood cells out, hoping to create an island or survival for the rich and famous on the East Coast while the rest of America dies a violent, painful death?

Let's just cut the tumor off at the legs and start over again. Raise interest rates, suffer the consequences -- and never empower a private bank to have a governmental role in America again. Banks are here to serve America, not to become its kings.

Oct 15 02:29 PM

[six:]

You can not look to the price of gold or oil to indicate anything about inflation or deflation or the economy. Everyone from large investors such as endowments and pension funds to the average Joe buying ETFs online have gotten into the commodities game. That makes the price of these assets realitive to nothing but the whim and fancy of investors. Gasoline Station sales were down 6.5% from August to September and the price of oil went up... It is what is... and it ain't demand.
Printing money means NOTHING if it is not being spent. Take a look at the velocity of money and see for yourself that the massive amount of money being printed is sitting in banks to prop up their balance sheet.
The Fed is going to do everything in their power to keep the wealthy wealthy. It is our turn to take control. Stop spending every penny you don't have to. We can crush the rich with asset devaluation.

Oct 15 03:24 PM

[clipper:]

I think we all give the FED way too much credit in its ability to steer the economy and markets. If it had this ability, why are we in this mess to begin with?
The FED creates credit, not money. Creation of credit adds inflationary pressures, destruction of credit deflationary. The mechanism that controls credit expansion is the willingness to take on risk .... otherwise no multiplier effect. No one, PP team excepted, is taking on risk right now. Thats why the CPI, employment, industrial production etc... are all anemic in the face of this worldwide deluge of new credit.

Oct 15 04:45 PM

[Moon Kil Woong:]

Jim: I agree with you that the Fed can oscillate between inflation and deflation. In fact the brunt of dollar depreciation is the fault of the Fed not the US government through their low interest QE policies. In fact, this is ruinous to their central task of selling US Treasuries which although you remember it's one of their main duties they seem to have forgotten (along with protecting the value of the dollar).

The Federal Reserve nowadays sees their main job is financing banks with cheap money. That's why dollar deflation is constant over time. Perhaps this has always been their goal, maybe it's just more transparent after watching them for 70+ years.

Regarding Europe, I strongly disagree with you. Europe is not in as much trouble. Their interest rates track down slower, their currecy is stronger, and they have definately have already hit the bottom unless the bottom falls out of the global market yet again. The fact thay are protectionist may factor in, but really, what rational country isn't by now besides the US which is now shouldering the entirety of the recession as Europe and Asia dump on us. Once againthey chose to play pattycake with the US and keeps on trying to fix the game so they permanently export more than they import.

Last, buying cash will only leave you with 10% dollar depreciation for what 1-2% interest. That's a major loss. Buying gold is only valuable if you leverage by buying things like commodities contracts which is a major risk given the Fed can not only oscillate inflation and deflation but also get the Treasury to dump gold to temorarily burn those going long. Without leveraging gold, it's realy just an inflation hedge that costs storage fee cost.

My suggestion is to do what central banks are doing, put some money into foreign stocks and currency. Anotherwards diversify away from Bernake and Greenspan's destructive economic policies. Not only is it deterimental to the US economy it's deterimental to the US Dollar and US Treasury Bonds. Really, tell me what can be worse long term than that!

Oct 15 08:17 PM

[Boxed Merlot:]

“Consider… the authorities…If they…In sum, the Fed…”
On Oct 15 02:29 PM Michael Clark wrote:
> 5 - Remember, the purpose of the Fed is to benefit the banks and
> elite finance…the next step is to insulate themselves from U.S. government control and
> U.S. government...who the hell are they? Is this a tumor that has attached itself to
> America and is sucking all the white blood cells out…? Let's just cut the tumor…

Authorities? The Fed? Their Handlers? These Bankers without Borders must be reigned in. The sovereign citizens of the United States must take it upon themselves to live up their principles of Freedom and reduce these parasites, including their handlers that are currently in “elected” servitude positions they voluntarily sought back to the private sector. It is absolutely absurd that these forces would have the gall to threaten our legislative servants, yet alone the soveignty of our nations citizenry. Maybe we need a better HR department to handle these employee disruptions!

Oct 15 10:08 PM

[Michael2343:]

I checked out the gold/euro vs gold/dollar, it highlights the fact of the weak dollar propping up both gold and stocks. In euro terms gold is not at a new high yet.

Although stocks have more to lose in terms of relative value than gold, gold can still take a hit from the rebounding dollar. In fact, it would make sense to me to purchase gold but only after the dollar regains some strength so your buying power isn't so paltry. If that bounce started today, you might be able to just wait and get 10 or 15% more gold for your dollar just on currency fluctuation.

The point is, from what I can see right now the risk is in entering the crowded short-dollar trade, which is what you are getting into if you buy gold today.

The great concern over keeping the dollar as the reserve currency, and preserving the dollar wealth of the rich will have to put a floor in for the dollar, at some point. Whatever that breaking point is will be as far as QE can go, I suppose.

Oct 15 10:37 PM

[Jim Bradley:]

Chap08: Here's what I'm looking at: In August of 2007 the securitization market seized up (I traded many bonds in this market as it collapsed nearly overnight - fortunately I did not rely on traditional hedging) ... that was when gold took off. During this time, the S&P tried one more time to rally, then fell for 7 months before gold showed any downtrend. Gold and stocks lagged the events significantly.

Then, Gold bottomed and took off 4 months before the stock market and a year before the credit markets.

A casual look at the CPI (not the best stats) will demonstrate that gold, even after eliminating the "froth" in the market in the 80s, did not protect any investors against inflation as it persistently sold off for two decades.

Gold was also uncorrelated to the dollar for a long time, as gold fell and the dollar rose or fell ... that is until more recently.

Basically I think the argument that gold responds to "inflation" and "deflation" hasn't been well verified over time. In fact, we haven't had real deflation (contraction of spendable funds and declining prices) by any measure, until just recently.

Take care.

On Oct 15 08:17 AM chap08 wrote:

> If everyone is wrong, would that include you too Jim? I think this
> is a good article and you have a number of things right, but I disagree
> with you on gold. You note "the huge fall in the price as inflation
> continued for decades". What you are talking about is a period of
> declining inflation (from the start of Volcker's medicine and then
> thru the 90s). Inflation fears disappeared. That's why gold fell.
> It went from a period of inflation panic to one where inflation risks
> were forgotten. Gold turned upward again when commodity prices and
> inflation fears returned in this decade.
>
> In your theory, the gold price depends on a "solid foundation under
> dollar assets - and the foundation can be broken by either a higher
> risk of price inflation or price deflation". If that was the case,
> then gold would have raced up when doubts about the "solid foundation"
> and deflation fears came to the fore last year right?? Wrong, gold
> fell ~30% and bottomed at the peak of the panic. Equally, gold would
> have sold off as confidence in the "solid foundation" returned this
> year, right?? Wrong, gold has rallied ~45%.
>
> Gold is where it is because we have policies that lead to a weak
> dollar and inflation. If we turn back towards deflation and get a
> dollar rally, then gold will do what it did last time and sell off
> 30%.

Oct 15 10:38 PM

[Jim Bradley:]

The wise investor will hedge their bets for direction, timing, and duration.

Whether the currency will end at "zero" doesn't tell us the critical issue of whether you or I will make it financially to that point. We could be wiped out by making investment mistakes long before that.

I think the lack of definitive direction and timing is the real crux of the issue here. For example, maybe it will be insane volatility, from one extreme to the other... that's essentially "none of the above".

All sorts of arguments can be made. Have you considered whether the authorities CAN inflate? Of course, in the abstract they can "do" anything, but creditors might hammer the bonds and force the government to either yield to deflation or go "all in" and hyperinflate. How anyone "knows" what the authorities will do and what the market will do is beyond me. It's a complex system that isn't predictable to that extent.

I have a suspicion, depending on the number and severity of the inflationist arguments, that we may be in for a period of the opposite. But I can be wrong like anyone else. We'll see...

BTW, oil at $72 isn't price inflation unless the trade weighted rise in oil is higher than the trade weighted declines in non-oil prices. Taking into effect all prices, we are closing in on the zero point, but we're not into the price inflation zone yet. And if we do go positive, the question is whether it accelerates, or rolls over in six months.

On Oct 15 08:48 AM Carlos Lam wrote:

> This statement by the author is incorrect:
>
> ---------
> 1 - No one really knows or can possibly know what the "endgame" will
> be ...
> ---------
>
> All fiat currencies eventually return to their true value: zero.
> Eventually, the dollar will fall. It probably will not occur for
> decades, but a wise person will position his assets to deal with
> such an eventuality. Indeed, the warning signs are evident:
>
> * gold surging to new nominal highs
> * oil at $72/barrel even though the economy is on its knees
> * the dollar falling against major foreign currencies
>
> Knowing that the signs of devaluation/depreciation are evident, the
> wise investor will try to move out of the dollar as much as possible.

Oct 15 10:57 PM

[Spartacuss:]

The Fed is NOT in control...no, the opposite, out of control. No one including the author gets it it seems.

The Fed, this time cannot raise rates, to do so would be tantamount to suicide as the US governement is bankrupt. Yes, bankrupt. In no way can the the government repay it's debt and thus the only worthwhile effort now is a feeble effort to reflate with the issuance of greater fiat at lower rates and is locked there for better or for worse.

We are at financial war, trying to reflate while trillions of deleverage is going on...a tug of war. Frankly, I don't think the Fed will win this one as the total amount of deleveraging forces are in the high trillions and thus a realistice reflation scenario would be a multiple of what the Fed has done so far and if pressed and they will be pressed with the new deleveraging forces of the coming home mortgage and commercial paper hit home in this next year which for some strange reason no one talks about. This author, lightly touches on the base line subject: defaults. Very deflationary. That in conjuction with outrageous generation of new money to stem the tide.

What I cannot understand is why no one seems to take the obvious in your face facts and write about them and their consequences.

We are screwed folks! Perhaps no author wants to come out and say that. Soon, we will come to realize that all new bubbles will be short lived as the dollar crashes, why? Because the Fed and the government have no other choice: inflate or die.

Oct 16 05:22 AM

[Carlos Lam:]

On Oct 15 10:57 PM Jim Bradley wrote:
>
> All sorts of arguments can be made. Have you considered whether
> the authorities CAN inflate? Of course, in the abstract they can
> "do" anything, but creditors might hammer the bonds and force the
> government to either yield to deflation or go "all in" and hyperinflate.
> How anyone "knows" what the authorities will do and what the market
> will do is beyond me. It's a complex system that isn't predictable
> to that extent.

It's not predictable with a 100% accuracy rate, but politics can tell one a lot of what government is LIKELY to do. Historically, democratically elected governments are much more likely to INFLATE than to increase interest rates because of the political repercussions. Indeed, the Reagan/Volcker team stands out because such a move is very rare.

Moreover, one can observe WHO is at the controls of monetary and fiscal policy to determine what is LIKELY in those realms. We have Christina Romer -- an open advocate of devaluation -- as Pres. Obama's chief economic adviser. We have Ben Bernanke as Fed Chairman, a man who's academic past shows a deathly fear of deflation. We have a President who voted for the TARP as a US Senator and then pushed for a $750 billion "stimulus" package.

The point is that when one is trying to get a grasp of the general trends in the value of one's currency, one HAS to keep an eye on the proclivities of those in power.

Oct 16 08:13 AM

[Robert D.:]

It may be wise to not just focus on the domestic problems and solutions. This battle to maintain economic growth and stability, turned from a game of poker (every country for himself), to a world wide team game (everyone working together). The reality of it is that the Fed realizes how much other countries depend on our economy (at this point in time, may not be so in the future), that they are going to wait this through. (no action)

I agree with many of the posters that other countries are doing worse than the US, and yet other countries like China, are forced to manipulate their currencies in order to maintain a balance of trade. This is artificially (indirectly) adjusting our inflation problem without the Fed having to raise interest rates (at least for a while longer).

It took Japan over a decade to slowly creep out of their banking crisis (have they ever fully recovered yet?). The Fed decided to take a soft landing approach, and in doing so, they may have prolonged this "recession" for years to come (most likely resulting in stagflation).

My opinion, foreign trade policy could make a serious impact on our economy's future. There is a lot of tension/pressure on these manipulated currencies, which may indirectly reposition the US in the circle of global trade (hopefully from net buyers, to net sellers). (One can dream anyway!...)

Oct 16 09:48 AM

[TheGugg:]

Radical, but so true. We should bring all of congress up on charges of "crimes against humanity" it's incredible that this government (our elected leaders) have squandered trillions. This grand experiment by the elite have decimated local leadership in favor of outsourcing, right sizing, bla, bla bla. Anyway we need to go back to our roots, get rid of central planning, start buying local and not entertain our selves at the big box stores full of Chinese products.


On Oct 15 02:29 PM Michael Clark wrote:

> Everyone in wrong? How can everyone be wrong? Some say tomato, some
> say tomatoe...? Some say deflation, some say inflation...some stay
> stagflation. Someone is bound to be correct. This item:
>
> 5 - Remember, the purpose of the Fed is to benefit the banks and
> elite finance. They do that by providing a market for treasuries
> so that Congress can overspend. But now that the Fed can issue it's
> own perpetual debt (paying interest on reserves!) the next step is
> to insulate themselves from U.S. government control and U.S. government
> insolvency.
>
> This is a bit scary. 'Insulate themselves from US government control'...who
> the hell are they? Is this a tumor that has attached itself to America
> and is sucking all the white blood cells out, hoping to create an
> island or survival for the rich and famous on the East Coast while
> the rest of America dies a violent, painful death?
>
> Let's just cut the tumor off at the legs and start over again. Raise
> interest rates, suffer the consequences -- and never empower a private
> bank to have a governmental role in America again. Banks are here
> to serve America, not to become its kings.

Oct 16 10:25 AM

[ebworthen:]

Our scenario: 1970's and Jimmy Carter but with less of a manufacturing base and core indsutries, more debt, more delusion.

Oct 16 12:39 PM

[bobbybutte:]

I too liked the article but gold is not a good investment at record highs

as a person who became financially independent through investing

A better way to hedge your investment at these levels is large cap multicap stocks at appropriate prices

Oct 16 01:06 PM

[Duude:]

On Oct 15 07:17 AM writejesse wrote:

> It is highly unlikely that the Fed will implement a Volcker-like
> tightening prior to the 2012 election.

I'd go a step further in saying that its entirely doubtful that the Fed will ever implement a Volker-like tightening. As bad as the economy was in the late 1970's and early 1980's, Volker had a few critical things on his side. First, we didn't have Humphrey-Hawkins meetings. The Fed never went before Congress to explain himself. Second, the Fed didn't even have to announce what they were doing when they were doing it. They really worked their charm behind the scenes and largely removed from the political process that today so dominates this era. Volker didn't need to have the brass balls that Bernanke would need to pursue a Volker-like forced recession. Who believes with all that Bernanke has done thus far that he could withstand the onslaught he would face in reversing course with the type of violent Fed game plan Volker ran. Frankly, Bernanke if flipping quarters and hoping he can run a string of quarter flips onto their edges.

Oct 16 02:24 PM

[Jason Rines...:]

Well stated friend. Anybody hearing Volker talking about raising interest rates? No, but you do hear him talking about VAT. Agree wholeheartedly with other commenters, stagflation will be our new economy. I do believe the scenerio will be a bit worse then the 1970's version.


On Oct 16 08:13 AM Carlos Lam wrote:

> On Oct 15 10:57 PM Jim Bradley wrote:

Oct 16 03:55 PM

[JasonC:]

The no-risk trade is so crowded it is clearly doomed.

Gold is up because it is perceived as a safe haven.
Treasuries are bid at tiny yields because --- same.
Commodities - same.
Cash yielding zero - same.

All of it is Pavlovian investing in reaction to last year's pain. As usual with rear view mirror anything, it is precisely wrong, 180 degrees.

There is no inflation and there is no prospect of any.

The dollar is about where it was a year ago. Everyone talks about its decline over 9 months and not the huge spike it had in the 2 right before that, in the crisis peak. In case everyone just forgot, the entire world being short dollars (for debt, to fund real anything, etc) and unable to cover *was* the bubble.

It will be a long slow recovery, with GDP growth positive but below peaks in both GDP for a while and asset values for longer. Unemployment will decline only slowly. Deleveraging is a long slow slog and not over quickly. But there will be no inflation to speak of during it.

Everyone thinking they have to play the next shift in the exchange value of money to get ahead is exactly focused on the wrong issue. Where can capital earn reasonable returns with moderate safety in the present environment? Anywhere it can, it will be paid handsomely because credit is ridiculously cheap and will stay so. Anyone willing to take the slightest risk will be paid. Except those betting the house (again...) on outlier monetary movements --- which is approximately the entire financial pundit class, plus every populist fad-chaser on the planet.

Think stable income producers. Think credit, utilities, preferreds. Add modest leverage at near-zero cost, and carry. Don't pay any attention to all the heavy breathing scare mongers peddling their ridiculous washboard fantasies of hyperinflation or great depression reruns -- they are a total crock, start to finish.

Oct 16 04:45 PM

[ebworthen:]

Yes...we must all be slobbering Pavlonian dogs...because if we aren't...you and a lot of other market players will lose everything.


On Oct 16 04:45 PM JasonC wrote:

>
> The no-risk trade is so crowded it is clearly doomed.
>
> Gold is up because it is perceived as a safe haven.
> Treasuries are bid at tiny yields because --- same.
> Commodities - same.
> Cash yielding zero - same.
>
> All of it is Pavlovian investing in reaction to last year's pain.
> As usual with rear view mirror anything, it is precisely wrong, 180
> degrees.
>
> There is no inflation and there is no prospect of any.
>
> The dollar is about where it was a year ago. Everyone talks about
> its decline over 9 months and not the huge spike it had in the 2
> right before that, in the crisis peak. In case everyone just forgot,
> the entire world being short dollars (for debt, to fund real anything,
> etc) and unable to cover *was* the bubble.
>
> It will be a long slow recovery, with GDP growth positive but below
> peaks in both GDP for a while and asset values for longer. Unemployment
> will decline only slowly. Deleveraging is a long slow slog and not
> over quickly. But there will be no inflation to speak of during it.
>
>
> Everyone thinking they have to play the next shift in the exchange
> value of money to get ahead is exactly focused on the wrong issue.
> Where can capital earn reasonable returns with moderate safety in
> the present environment? Anywhere it can, it will be paid handsomely
> because credit is ridiculously cheap and will stay so. Anyone willing
> to take the slightest risk will be paid. Except those betting the
> house (again...) on outlier monetary movements --- which is approximately
> the entire financial pundit class, plus every populist fad-chaser
> on the planet.
>
> Think stable income producers. Think credit, utilities, preferreds.
> Add modest leverage at near-zero cost, and carry. Don't pay any attention
> to all the heavy breathing scare mongers peddling their ridiculous
> washboard fantasies of hyperinflation or great depression reruns
> -- they are a total crock, start to finish.

Oct 16 06:47 PM

[Northstar10000:]

Down goes stocks-oil-gold== up goes the dollar

Oct 16 08:58 PM

[Plan B Econ...:]

According to Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland), the hyperinflation tipping point is a 40% budget deficit.

www.planbeconomics.com.../

Oct 17 12:02 AM

[Andrew Butter:]

Nice start but you got lost, twice.

1: Economists (in their infinite wisdom - that which gave us inflation targeting and the credit crunch), differentiate between asset price inflation and "inflation". Sure if wages go up people will be able to service their mortgages - but that seems a long way away with unemployment skyrocketing.

The main reason people are walking away from their homes is that they are seriously underwater - that's driven by a different dynamic that neither the banks or the Fed can control (BubbleOmics).

You are correct about the dollar, it's the best of a bad bunch, it won't go down significantly.

It is argued that hyper-inflation in the Weimar Republic was caused mainly by foreigners shorting the currency, that's not happening now.

2: Gold is a refuge now for uncertainty, reference the oil price which explains 75% of golds movements since 1971, it is over priced, (on that matrix it should be $600) so unless the oil price goes up (unlikely in the short term from $75) at some point the "gold bubble" will pop (whenever "confidence" in something returns.

Oct 17 02:12 AM

[Andrew Butter:]

I'd say you got it about right


On Oct 16 04:45 PM JasonC wrote:

>
> The no-risk trade is so crowded it is clearly doomed.
>
> Gold is up because it is perceived as a safe haven.
> Treasuries are bid at tiny yields because --- same.
> Commodities - same.
> Cash yielding zero - same.
>
> All of it is Pavlovian investing in reaction to last year's pain.
> As usual with rear view mirror anything, it is precisely wrong, 180
> degrees.
>
> There is no inflation and there is no prospect of any.
>
> The dollar is about where it was a year ago. Everyone talks about
> its decline over 9 months and not the huge spike it had in the 2
> right before that, in the crisis peak. In case everyone just forgot,
> the entire world being short dollars (for debt, to fund real anything,
> etc) and unable to cover *was* the bubble.
>
> It will be a long slow recovery, with GDP growth positive but below
> peaks in both GDP for a while and asset values for longer. Unemployment
> will decline only slowly. Deleveraging is a long slow slog and not
> over quickly. But there will be no inflation to speak of during
> it.
>
> Everyone thinking they have to play the next shift in the exchange
> value of money to get ahead is exactly focused on the wrong issue.
> Where can capital earn reasonable returns with moderate safety in
> the present environment? Anywhere it can, it will be paid handsomely
> because credit is ridiculously cheap and will stay so. Anyone willing
> to take the slightest risk will be paid. Except those betting the
> house (again...) on outlier monetary movements --- which is approximately
> the entire financial pundit class, plus every populist fad-chaser
> on the planet.
>
> Think stable income producers. Think credit, utilities, preferreds.
> Add modest leverage at near-zero cost, and carry. Don't pay any
> attention to all the heavy breathing scare mongers peddling their
> ridiculous washboard fantasies of hyperinflation or great depression
> reruns -- they are a total crock, start to finish.

Oct 17 02:14 AM

[Michael Clark:]

I like your thinking. The wild card in all of this debate is just how much crap Americans are willing to take from the elite who think manipulation is the essence of life. They think we are stupid and that we will take anything they hand out. Maybe they are right. I haven't seen anything so far to make me think we are reaching the end of tolerance. The interesting thing I see is that many traditional conservative and traditional liberal are growing more and more angry at both Wall Street and Washington (together -- for now they are fused at the hip). I think Obama's political stock would rise significantly if he turned on Wall Street (the banks especially) and cut them down to size. I'm not sure why he isn't doing it.


On Oct 15 03:24 PM six wrote:

> You can not look to the price of gold or oil to indicate anything
> about inflation or deflation or the economy. Everyone from large
> investors such as endowments and pension funds to the average Joe
> buying ETFs online have gotten into the commodities game. That makes
> the price of these assets realitive to nothing but the whim and fancy
> of investors. Gasoline Station sales were down 6.5% from August
> to September and the price of oil went up... It is what is... and
> it ain't demand.
> Printing money means NOTHING if it is not being spent. Take a look
> at the velocity of money and see for yourself that the massive amount
> of money being printed is sitting in banks to prop up their balance
> sheet.
> The Fed is going to do everything in their power to keep the wealthy
> wealthy. It is our turn to take control. Stop spending every penny
> you don't have to. We can crush the rich with asset devaluation.

Oct 17 08:54 AM

[Michael Clark:]

We think death is a permanent state. It isn't. Death through deflation will not be the end of America. Those who have no comprehension of cycles assume it is either life or death -- but, in fact, it is life, death, and life again. Raise rates. Pay our debts the best we can. Sober up. Become a self-disciplined race, like we once were.

We've been convinced by the lenders that the Party Life is the ONLY life. We are a nation of debt-o-holics. We have to de-tox. More drink is not what we need. We need to face facts -- look death in the face, and not blink.


On Oct 16 05:22 AM Spartacuss wrote:

> The Fed is NOT in control...no, the opposite, out of control. No
> one including the author gets it it seems.
>
> The Fed, this time cannot raise rates, to do so would be tantamount
> to suicide as the US governement is bankrupt. Yes, bankrupt. In no
> way can the the government repay it's debt and thus the only worthwhile
> effort now is a feeble effort to reflate with the issuance of greater
> fiat at lower rates and is locked there for better or for worse.
>
>
> We are at financial war, trying to reflate while trillions of deleverage
> is going on...a tug of war. Frankly, I don't think the Fed will win
> this one as the total amount of deleveraging forces are in the high
> trillions and thus a realistice reflation scenario would be a multiple
> of what the Fed has done so far and if pressed and they will be pressed
> with the new deleveraging forces of the coming home mortgage and
> commercial paper hit home in this next year which for some strange
> reason no one talks about. This author, lightly touches on the base
> line subject: defaults. Very deflationary. That in conjuction with
> outrageous generation of new money to stem the tide.
>
> What I cannot understand is why no one seems to take the obvious
> in your face facts and write about them and their consequences.<br/>
>
> We are screwed folks! Perhaps no author wants to come out and say
> that. Soon, we will come to realize that all new bubbles will be
> short lived as the dollar crashes, why? Because the Fed and the government
> have no other choice: inflate or die.

Oct 17 08:59 AM