austrian63

Don't Be Fooled by Inflation

Ricard,

One error in your response. Bernanke has not taken unconventional steps to "DEFLATE" asset bubbles. He has taken unconventional steps to RE-INFLATE asset bubbles and therein lies the rub. There will be a very high price to pay.

Each subsequent market deflation is much more horrific than the previous one and thus requires a much larger dose of the re-inflation drug than the previous one. This is what Hayek decrobes as having "A Tiger by the tail." The cure is the disease and more cure only makes the disease worse until finally the party is unsustainable and even the U.S. Treasury and Federal Reserve with their infinite wisdom and money creation abilities will not be able to sustain the booms.


On May 10 06:21 AM Ricard wrote:

> This is a rather interesting article from Mr. Schiff.
>
> Something I've noted is that he apparently has the reputation of
> getting the macro picture spot on, but unfortunately being unable
> to transform that into portfolio gains. I'd suspect it may have to
> do with market-timing, evidenced by his bold prediction here of a
> 2-year stimulus rally.
>
> Running with this theme (which may very well be correct, and may
> actually give Cetin an A+ in weathering this downturn), it's entirely
> probable that the economy may 'fully recover' from this stimulus
> package as it did from the last one in 2002. Bernanke, like Greenspan
> before him, has taken unconventional actions in trying to deflate
> asset bubbles, and like his predecessor, may have to be held responsible
> for any unpredictable consequences. If this thesis hold true, then
> perhaps, like last time, the bubble will not pop - the landing will
> not only be soft, it will be as if the markets landed on a trampoline,
> propelling them to even higher dizzying heights, until at some point
> the subsequent fall destroys the trampoline, and the markets along
> with it. Maybe during the next 'crisis', the fed will be forced to
> adjust reserve ratios, i.e., the nuclear option.
>
> So, to summarize my rather complicated comment - maybe Schiff has
> a point - markets artificially recover, do not experience the much-needed
> recession and readjusting, and the bubble never pops. My contribution
> to this thesis is that perhaps we are setting the stage for an even
> larger and longer artificial boom.
>
> Anyway, thanks again Mr. Schiff for another interesting read.

Monetary Madness in a Single Chart: Hyperinflation's Just Around the Corner

MBS's are not money. They are not part of M1, M2, M3 or M"pick a number." To state that the Fed has created all of this new money to replace money that was destroyed via the reduction in the value of long-term investments is incorrect. None of these assets are "money" and none of them are included in the monetary measurements. They all have liquidation costs and take time to convert/realize into money. Oh, and your house, which may have also lost value, is not money so the reduction of real estate values also does not represent "destroyed" money.

It is a common, logical fallacy to conclude the new money being created out of thin air merely replaces the old money that was lost due the popping of the Fed's real estate bubble therefore we should not worry about devaluation. Most mainstream economists, who by the way never saw this bubble or its bursting coming, will parrot this view but it does not make it true.

On Jun 13 04:47 AM nobby73 wrote:

> As others have said, this graph is misleading. This money has been
> created to replace the other forms of monetary assets such as MBS,
> which were sucked out of the system.
>
> It makes much more sense to look at broad money supply as you then
> see the monetary base had been expanding at a much faster rate than
> this graph shows and the collapse in the repo market for ABS was
> the hugely deflationary event this stimulus was designed to counter.
>
>
> Were we have seen hyperinflation, eg Weimar Germany or Zimbabwe,
> you see shocks in the relationship between prices and wages. Efforts
> to create price controls which lead to lack of supply of goods followed
> by large wage increases to counter price rises when those controls
> are reduced. I don't see this happening in the US....

Monetary Madness in a Single Chart: Hyperinflation's Just Around the Corner

Not to dminish Laffer's points but he didn't see this coming in 2005 and 2006 when he said the U.S. economy was stronger than it's ever been.

We need to stop calling rising prices inflation. Inflation is growth (just like blowing up a balloon - a bubble) in the money supply. This growth causes a decrease in the Purchasing Power of Money (PPM). Laffer states in his article the Fed signaled a 180 shift from an anti-inflation position to an anti-deflation position. The Fed has NEVER been anti-inflation and has ALWAYS been anti-deflation. Unless you know of any one else besides the Fed who can create money either by printing new paper slips (Federal Reserve Notes) or increasing member bank reserves (expansion of bank credit) only the Fed can create inflation.

Why do we continue to discuss the Fed as if it is sometimes "hawkish" on inflation. The purpose of the Fed is to be the "lender of last resort" and to inflate the money supply. Here's a quick peice of trivia: since 1913 the U.S. dollar has lost approximately 96% of its purchasing power under the watchful eye of the ever hawkish Federal Reserve Bank whose initial mission was, get this, price stabilization. In the 93 years prior to the birth of the Federal Reserve Bank (1820-1913), a terrible time for sure since there was no Central Bank run by geniuses whose very words were worshipped by the chattering classes, what cost $1.00 in 1820 cost $0.63 in 1913 due to increased productivity and the growth of goods and services in the market place competing for dollars. This was a time when money still had both of its original purposes (1) a meduim of exchange and (2) a store of value. It is no longer a store of value thanks to our wise rulers in Washington D.C. But I digress.

Laffer's predictions are most likely true which proves one can actually be right, some times, even for the wrong reasons. Currency devaluation is a better description of what lies ahead and it will entail both rising prices and rising interest rates. It will be very interesting.

Rising Rates, Oil Prices Could Trample Green Shoots

Oil will most likely pass the $100/bbl point before year-end. Mad-Hedge Fund Traised good points above re: the world getting smaller. It will take time for economies to adjust. In the interim, expect much higher prices for food, clothing, raw materials, along with energy and interest rates (cost of money). In essence, the scarcity of resources will become apparent except for labor.

Much higher production costs and currency devaluation will depress the dmand for labor in the U.S. There can be no gain without pain. We cannot have booms that seriously misallocate resources fueled by massive money supply growth without the pain of re-adjustment. The more our government does to prevent the short-term pain of recession the more likely we will have long-term pain. This will become more apparent as energy prices begin spiking again late this year and in 2010.

An Ill Wind Indeed

Paco,

Good article. The truth hurts. It will be interesting to another one of Mises' predictions come true namely the impending currency crisis that awaits us in 2010 or 2011. I have found all of the deflation talk among the chattering classes humerous. It reminds me of Hayek's statement that people should worry about depressions during the booms but that's the time when no one listens. Last summer was the time we should have begun to worry about inflation, or more accurately, currency devaluation but instead the news media and mainstream economists were warning us of the dreaded monster called deflation.

These are the same people who didn't see the real estate bubble. The fact that they were worried about deflation alerted many of us that currency devaluation was the real risk. We are starting to see the beginnings of this now and it will become more evident over the next 12 to 24 months and culminate in a currency crisis. The sad thing is many people who continue to depend on the advice of the mainstream will have their wealth invested in dollar denominated paper assets and will suffer greatly as the savers did in Weimar Germany in 1923.

Three Possible Causes of Yet Another Downturn

"The government is rushing in to help instead of making things worse."

Government "help" is causing us to consume capital, the very life blood of growth and progress. How many new technologies and businesses will never start because capital was diverted to "save" corrupt, inefficient and bad businesses? Also, loose credit, artificially low interest rates and an expanding money supply caused the problem in the first place.

A Strong U.S. Dollar Isn't in Anyone's Best Interest

Right on. We are actually consuming capital now. As we continue this our ability to produce will fall more and more over time as we consume more and more of our capital base with zero % interest rates and continued borrowing. Debt is subject to the same law of diminishing marginal utility that money is.


On Apr 03 02:48 PM clam75 wrote:

> Mr. Harless is supportive of statist intervention in the economy,
> as this article demonstrates. Moreover, he wrote a book entitled
> _The Indebted Society_ that had a forward from John Kenneth Galbraith.
> A Publisher's Weekly review of his book indicates that he calls for
> "tax-sheltered personal savings, legal job protection for older workers,
> extension of unemployment benefits and drastically slashing the federal
> deficit by further taxing the top fifth of U.S. households." So,
> from his point of view, a weak dollar and interventionist state would
> be positive.
>
> As an Austrian School follower, I believe the opposite is true: a
> strong currency reflects people's desire to purchase things produced
> by the nation where that currency is in use; they need that particular
> currency because they need to pay for the items they purchase. That
> brings to light a key problem for America: our production capacity
> has been declining for years because of interventionist government
> and unsound money. Until we can re-establish production, the dollar
> is going to continue declining in value.

A Strong U.S. Dollar Isn't in Anyone's Best Interest

12345 is correct.

From 2001 through 2007 the U.S. $ depreciated against the Euro and gold not to mention oil and other commodities. How could this support Harless' claim of a strong U.S. $ during this period?

Not to fear, the dollar will begin depreciating heavily against real goods by the end of 2009 or in 2010. The current monetary inflation - inflation is not rising prices but an increase in the supply of money, which then leads to rising prices - will guarantee this. Money is like all other goods and subject to the law of diminishing marginal utility. Each additional unit, created out of thin air, reduces the value of all previous units. This effect will be even more pronounced if production, the quantity of goods and services available for purchase in the economy, stays flat or decreases over time. Then you will have even more monetary units chasing a smaller inventory of goods and services.


Mr. Harless will get his wish as the U.S. $ will weaken over the next several years more than we can imagine.


On Apr 03 01:48 PM 12345 wrote:

> “A strong dollar is in our national interest,” still echoes through
> the air in the District of Columbia. Never mind that the strong dollar
> was largely responsible for the housing boom that led to the current
> bust."
>
>
> WHAT! The Dollar was falling fast during the Boom, cheap money and
> a weak Dollar is what drove housing prices so high. How can a strong
> Dollar drive prices up?

Jim Rogers Believes World Is Heading for Depression

To logicalsinger,

I think Jim Rogers does get the fundamentals of wealth creation. He knows that wealth is NOT created by creating money out of thin air. Wealth is created by innovation, production and exchange. Money is merely a medium of exchange and like any other product it is subject to the law of diminishing marginal utility. The more units of money that exist, the less value each unit has.


On Apr 02 09:05 AM logicalsinger wrote:

> I don't think Rogers gets the fundamentals of wealth creation. At
> the root is the intellectual property machine which has been until
> now US-based innovation and technology. Emerging markets wealth is
> derived from that root wealth creation when American and European
> companies move to outsource manufacturing and services. Until you
> see major proprietary innovation and intellectual property (tech,
> pharma, media etc.) coming out of emerging markets, I wouldn't get
> too excited again about those markets.

Bernanke Desperate, Fed Out of Ammo

Karl,

Sorry to burst your bubble re: free markets, but we don't have one. How do you know that unregulated markets lead to booms and busts when you have never lived in one?

Our market is highly regulated. In fact, the supply of money and the cost of money (interest rates) are controlled by the Fed not the free market. The Federal Reserve Bank, Fannie Mae, Freddie Mac, etc. are creatures of government not the free market. These wonderful government entities are the primary drivers behind our current boom bust cycle.

In fact, the artificially low interest rates actually contribuited to a decline in real savings while at the same time there was an increase the demand for loanable funds (debt). This created the mismatch and also created an unsustainable level of debt and misdirected resources to unprofitable (can you say "sub-prime" mortgages and new home consftruction) projects.

Good luck on curing the business cycle with more regulation. In fact, how does the government regulate the government?


On Mar 22 02:42 PM Karl Glazier wrote:

> This is a typical example of amateur economists (like Ron Paul) who
> have no idea how things work telling the experts what they are doing
> wrong.
> It's like laymen telling brain surgeons they are doing it all wrong.
>
>
> Bernanke is putting the most advanced theories into practice.
> With widespread overcapacity, increasing money supply will not lead
> to inflation, but to renewed economic growth.
> And the Fed is not out of ammunition, because they can create unlimited
> amounts of money, whatever is needed to get us growing again.
> Ron Paul's libertarianism (represented by Greenspan's refusal to
> regulate) is what got us into this mess.
> Unregulated markets lead to booms and busts.

What Defines Inflation or Deflation?

Steve,

Great analysis. I agree with Rothbard's TMS definition of the money supply. Your article is based on cause and effect and therefore it was refreshing to read a good analysis that properly defines inflation and deflation and that is able to foresee the effects of the current wrong headed (once again) moves of the Fed. It is frustrating that we are in this continuing bubble cycle because the massive Fed interference is increasing the magnitude and frequency of each boom-bust cycle. I think we are already seeing some small signs of the larger inflation in the market place but they go unnoticed for the remainder of this year.

What is your outlook for general price level rates of increase in 2010 and 2011? I am forecasting that durable goods prices as well as daily consumer staples will begin to increase in price at an increasing rate by early 2010. Then we are in for a whole new form of recession as recessions in which the costs of daily living (including interest rates) are increasing at rapid rates stunt economic growth even more than a "deflationary" or a "stable" price level recession.

Thanks again for a great article.

Government Panic Could Herald Dollar Panic

Unfortunately but not unexpected, the Obama team will continue the same profligate policies that have gotten us here. More stimulus any one? Beware the "fixes" the new brain trust send us. If over spending spending and over leveraging by individuals and businesses got us here how can the same behaviour by gorernment cure the malady?

Deflation Is Just Around the Corner

user 55065 hit the nail on the head. 55065, you must remember that most "experts" and writers follow the herd mentality and don't use critical thinking. Also, if they are part of the monied interests, they don't do their own grocery shopping. You are correct there is NO systemic deflation (or more appropriately no sustained decrease in the general price level). A sustained decrease in the GENERAL price level is not possible in a fiat money system.

The prices of goods and services purchased by most people on a daily basis are rising not falling. Remember, just because the herd states certain axioms over and over does not make them true. Those who are warning of deflation now never warned of the current crisis that is the unintended consequences of expansionary monetary policy. Once inflation has hit historic levels, they will be warning us of inflation.

All current policy initiatives have as their stated purpose, rflation (currency devaluation) and the ever decreasing purchasing power of the dollar will also be their unintended consequence.

The Coming Dollar Deflation

David,

It's all about timing. You are correct re: the short-term uptrend in the dollar vs. other currencies, gold and other commodities. This caught me by surprise. The medium term 2 - 5 years, is hard for us to grasp. The tide will turn as the Fed and Treasury continue to create more currency. We already have massive inflation (growth in the money supply). This will be the proximate cause of higher prices in dollars for most things we purchase in the future.