TechGuy

Consumer-Driven Deflation? Not Even Close

On Dec 02 12:23 PM Shabba wrote:
> This is absolutely nuts. It is clearly deflationary right now. The
> author totally ignores CREDIT. CREDIT acts just like money, and it
> has all but disappeared for most people and many corporations.<br/>
>
> The actions of the federal reserve are to counter balance against
> this collapse in credit. Credit is basically part of the money supply.

Credit disappeared in the Weimar Republic and in Zimbabwe. Neither experienced deflation. In addition the US still has abundant credit. People are still buying home, cars and other stuff on credit, just no where near as much durning the bubble, and it not as cheap. The US gov't is also borrowing considerably more money today, much more than the bubble years.

Don't believe, Call up the FHA lender or perhaps a GSE and ask them for a mortgage. No Problem!

Deflation also requires falling prices, but thats not happening either. Stores are selling less or goods of less quality, but the price has remained unchanged. Retailers use "Just In Time" distribution and no longer stockpile huge inventories of goods that they bought on credit. There is no push to cut margins to move inventory. They match purchases with sales. As prices fall, they buy less and they widen store isles.

Also look at commodity prices. Since March, they stopped falling and started rising. For the past 6 months Oil has been ranged bound between $72 and $81 despite falling consumption. Suppliers are just not going to sell oil cheap. Also look at the prices for base metals and precious metals. Prices are rising, not falling. Food Prices nada. In fact food prices appear to be rising again. So with the exception of falling real estate prices, everything thing less is either stable or rising in cost.

Government Grossly Underestimates Fannie and Freddie's Capital Needs

What about investing in Printing Press, Green Ink, and Cotton Paper?

Why Hyperinflation Is Not Coming

Hyperinflation is coming, just not this year or next year:

1. The Fed and gov't are determined to prevent deflation. Since the US dollar is Fiat, there is nothing preventing them

2. The Fed will get even more creative, perhaps by creating negative interest rates to stimulate spending. When the public believe inflation is coming, they will spend every last dollar they've saved and every dollar earned. But this change takes years. It took about 4 years for the credit crisis to appear since the time the Fed crushing borrowing rates and provided other measures to create this nightmare. So don't expect hyper-inflation to happen overnight.

3. Private Foreign investors are dumping dollars and US capital assets. The amount of capital assets sold by foriegners was near $200 Billion for Q1, and this party is just getting started. The US economy has be dependent on foriegn capital investment. The only remaing buyers of US debt are foriegn central banks. I suspect that the Fed is pulling strings behind the scenes by giving foriegn Central banks money to buy US debt to provide an illusion of stability. I don't see how foriegn CB's are able to step up their purchases, when trade surpluses are collapsing and much of there trade surpluses are already invested in US debt. Where is the source of money coming from?

4. Entitlement obligations are coming home to roost. The Social Security Surplus disappeared this year. Gov't outlays to pay for promised entitlements are about to go vertical, as revenues for these programs crash. The gov't has no choice but to print trillions to pay for them. The more money that the gov't throws at health care and retirement benefits, the faster prices will go up.

5. Loss of Dollar purchasing power for overseas goods and services. The US economy is dependent of foriegn goods. 99% of all good manufactured use parts and raw materials of foriegn origin. The US also imports about 70% of its Oil from overseas. The dollar's value has declined by about a third since 2000 against major foriegn currencies.

6. The US dollar is on the verge of losing its status as the worlds reserve currency. Once this happens the US will have to raise foriegn capital to pay for its imports. Foriegn Central banks will no longer re-invest their trade surpluses in to US treasuries. When this happens its very likely the value of the dollar will plummet very rapidity leading to hyper-inflation.

When will the US experience Hyper-inflation? Its nearly impossible to know. If the US gov't remains on its current course, my wild guess is in the next 4 to 5 years.

U.S. Debt Default, Dollar Collapse Altogether Likely

Consider that if the dollar collapses, the gov't will need to use PM's to pay for strategic imports, such as Oil, and parts made overseas to keep the trains and farm tractors running.


On Feb 04 09:40 AM MikeLovesGold wrote:

> The Government will not confiscate gold. Since the dollar in 1933
> was backed by gold, the Government confiscated it so they could print
> as much money as needed to shore up both the banking system and the
> economy. 99% of the population owned gold in 1933, they carried it
> in their pockets, and they carried it in their purses. Now, in 2009,
> less than 1% of the U.S population own gold. Thus, it would not be
> worth the Government’s time to confiscate it.

Treasury Yields Hovering at Historic Lows

The US budget deficit is expected to be about $1.2 for FY 2009. This doesn't include the cost of the pending $800 Billion bailout bill still on the drafting board. To accomidate an addition $1.4 to 2.0 Trillion in funding is going to be very tough in a global recession. The majority of savings to purchase US treasuries comes from foriegn investors and foriegn central banks. Is very likely that a much larger potion of savings will be consumed or invested at home, rather than be used to purchase US treasuries this year.

Bernanke and other Fed officials have stated that they can contain inflation when it breaks out. I see several huge flaws in their argument:

1. They expect that inflation will only appear when the US economy re-inflates and unemployment falls. Inflation can also occur during currency devalution, resulting in much higher import prices, as had occured during the 1970's during the period of stagflation. During this period inflation soared at the same time as unemployment rose.

2. The Fed cannot quickly liquidate trillions of bad loans its holds in collateral without causing another financial crisis. How does the Fed recall lent capital without returning the assets it holds as collateral? How do banks return capital that has been loaned out or used to re-imburse investors for thier investments?

3. The Feds flawed model assumes that asset prices are not grossly over priced and unaffordable at current average american worker's wages. Either the dollar is greatly over-valued or assets are greatly over-valued. The Fed cannot cherry pick the statistics it wishes to suit its needs. If they try to re-inflate the economy and attempt to maintain current asset prices, the dollar will devalue resulting it much higher inflation. There is no way that American families earning less than $60K per year can afford homes in the $400K to $800K range.

4. The Fed and Congress are ignoring 70 years of economic change in the US by enacting policies used during the 1930's to fight deflation. The United states of today, deeply in debt, and utterly dependent of foreign capital and trade deficits is completely different than the United states of the 1930s, which had balanced budgets and a trade surplus. The extrodinary amount of money used bailout failed US companies is endangering the stability of the US dollar. Without a stable US dollar the US federal gov't becomes insolvent. The US dollar is the only means that the US federal gov't has to pay for goods and services.

Considering that the Fed severely under estimated the scope of the financial crisis, it would be grossily foolish to take the Fed's word. For nearly a year the Fed had stated that it had contained the subprime crisis, and later the credit crisis, but was proven dead wrong. I suspect that the Fed will be able to contain inflation as well they were able to contain the credit crisis.

FWIW: I suspect that we will see a bond crash by the end of this year, as the amount of new debt issued overwhelms investors and as investors lose thier appetite for near zero yields on gov't debt. After bonds collapse the US federal gov't will have to resort to printing money. If the interest rates on short term US treasuries near or exceed 7%, the US will have to effectivelly default. The interest payments due on the large amounts of short term debt would consume too much revenue without shutting down the majority of the federal gov't. Once the gov't resorts to printing, it's a one way trip that leads to the breakup of the United States. Most likely regional states will form into independent countries issuing their own currecies when the US Federal dollar becomes nearly worthless.

Massive Inflationary Pressures Will Lead to Uptrend in Gold

Siggy Wrote:
"I would just like to know where the inflationary pressure on wages is going to come from..."

As the Gov't spends more its needs to consume more savings from around the globe. All this spending will eventually exceed the amount of money that can be invested in US treasuries. This will lead to a bond crash, and devaluation of the dollar. The US has been running trade deficits for decades and need to import just about everything. When the dollar is devalued, the prices of imports will soar causing inflation.

Consider that during the 1970's we had stagflation. Unemployment was soaring but so was inflation because of rising import prices. The same will happen again, even if the US economy is in a depression. Also look at countries that had massive currency devaluations or defaulted on debt, such as Argentina, England and Germany during the 1920 when their currencies were devalued.

Enjoy the Strong U.S. Dollar While You Can

What if the US gov't simply doesn't issue new debt for all this new money they have already committed? It could be a while before the bond market wakes up. So far, only a tiny fraction of the bailout funding has been issued as new gov't debt.

I have doubts that the Treasury will issue trillions of new debt in 2009 to address all of the money they've handed out so far. Much of the new debt has been issued through the Fed which not provided any transparency of the money they have lent, and the Fed can print money without issuing bonds to balance its books.

The bond market almost always responds to the inflation figures published, not the money supply or gov't lending commitments (ie not very foward looking). Since the economy is still falling, all this new money isn't going to impact inflation for a while. When it does it could cause a nasy spike inflation and cause a very quick collapse of the bond market.

My point is that shorting Treasuries may not pay as quickly as some may believe, and it may not pop because the supply of debt increases beyond supply of cash. It may pop because of a dollar collapse. What good are profits paid in USD if its devalued by 70% to 90%? Shorting Treasuries using a index fund may end up be a lose-lose investment, since your profit is paid in USD.

Best of Luck

Being Wrong for Five Years Makes Peter Schiff Right Now?

Peter would have been right if Greenspan had not done the unthinkable back in 2003: lower the Fed rate to 1%. The US economy was on very shaky ground back then, and was leaning to deflation by early 2003. I doubt back in 2002 Peter believed that Greenspan would cut the fed rate to the bone, and also tell the public to load up on ARM's.

This time the Fed doesn't have an magical wand to re-inflate the economy, without causing mass inflation. For the short term, deflation is going to be in control. Sooner or later the US treasury market is going to crash and well see a full throttle push into to mass inflation. The US is going to continue to load up on new short term debt. At some point the global market is not going to be able to absorb new govt' debt (especially in global recession). When the Treasury bond market crashes (6% or higher on short term bills), it will be the end of road. Suddenly US interest payment outlays will soar, which will eventually consume a high percentage of tax revenue. This will force the gov't to print dollars to pay its bills. Lets not also forget the huge entitlement programs, which outlays are now shifting into higher gears.