I think you are right about deflation, as the inflationist are missing a very important point They mistake those green pieces of paper that Bernanke keeps printing and dumping on the banks so they can buy US Treasuries as money and this “excess” money will cause inflation.

The reality is that these pieces of paper have not been “money” in the US for a long time, because in reality “credit ” is our money. Everything is bought with credit by gov’t and the people. Our “money” is the plastic in our wallets, mortgages, home equity loans, car loans etc.

While FR$ are being printed the credit contraction of our real money is sharp and will continue and this can only bring deflation. Shortages and lack of supply may cause future prices increases and a currency devaluation, voluntary or otherwise, may appear to cause inflation (price increases) but

The Bond markets know this in spite of the media constantly ringing the inflation bell.

Until a new type of stable monetary system is found for the US and indeed the world it appears that inflation is not the biggest worry around.

Here’s a good read for the senor !!

http://fofoa.blogspot.com/

&&&&&&

Thanks for posting this excellent essay, Patrick. The author takes care to note that inflationists and deflationists see the same end result: catastrophic economic collapse and a world thrown instantly into beggary. He is respectful of Prechter, who in my opinion is the worlds’ foremost authority on deflation. Prechter has gotten into trouble with inflationists because of his once very bearish stance on gold. But his thinking has evolved, as gold bugs will have surmised, and he now writes that gold should be a part of any defensive portfolio, since it is bound at the very least to hold its purchasing power.

The resulting collapse of the dollar is certain, and it will happen as Martin Armstrong has described it – instantaneously, in a waterfall cascade. There are compelling reasons for us to expect the entire hyperinflationary episode to play out in a matter of days, and for the ensuing collapse to put the economy in a severe deflationary wallow that will last for at least a generation. That is not how the Weimar inflation played out — it took nearly ten years — and the likely speed of the coming financial blitzkrieg holds very daunting economic implications for all, even those who have secured their assets in gold.

RA

Rick,

You make a good rational case for the deflation scenario; however living in the Philippines during the Marcos regime inflation was very much alive due to currency debasement.

Even considering that there economic fundamentals were weaker than ours, they still had massive problems with inflation. They also had a problem of a weak manufacturing base and had to import many items which of course were much high relative to their currrency.

Personally, I’m still confused on the “inflation/delflation” discussion. The only thing
certain is that we are about to find out.

Enjoy your info and writing.

Rick,
Thanks for bringing the inflation-deflation discussion back on the “front page.” You’ve been trying to get it through my thick skull about the threat of a prolonged deflationary period. Between you and Senor Cuidado, the light in my head finally came on. Thanks, you two, and to the other thoughtful contributors on all sides of this topic.
I’m curious about the fate of silver prices in Senor Cuidado’s scenario of coming events?
Best of luck to all, Paul

Rick, thanks for reposting my comment.

-Gas will be 8 or 9 bucks a gallon; and people will pay for it, because they will have no choice just as they don’t in Europe already.

Edward, the U.S. is not Europe. Our geography requires a lower gas price in order to keep our transportation grid flowing. Our economy would experience a devastating deflationary shock from $8-9 gas. I suppose the people might “pay for it” but then they won’t have any money to go to restaurants, or buy any clothes, or go to the dentist. A quick tripling of the gas price from the current level would cause an extreme unemployment spike when discretionary income retailers are simply wiped out. Or prices will collapse along with demand for other items and services.

But I say the $9 price is not even possible because domestic gas demand will fall rapidly in response in any climb above $4. We were in the red zone at $4 gas last year. Even a $6 gas price probably means total defeat for most sitting politicians in the U.S., and radical new political pressures on the Saudis/OPEC. And $8 gas is radical: it probably means an outright military takeover of the Saudi Oil fields or the sudden end of new car sales in America.

The price of oil is also the basis of the price of food. If Americans will be spending all of their money on gas and groceries…then that means a nasty deflationary outcome for every other sector of the economy. Debtor nation status, de-industrialization and off-shoring (global wage arbitrage) preclude a 1970’s outcome here for the U.S.

-I suggest you read Jim Sinclair to understand that the dollar is on its way to a devaluation and what that means. Also, you aren’t up to date on your Denninger, because he is changing his tune about the prospects for hyper-inflation.

I read Sinclair and Denninger regularly. A dollar devaluation does not necessarily equal hyper-inflation. We hit Peak Credit as per the Mish Shedlock thesis, and we are nowhere near a reversion to a corrective level of credit. Consider that the coming vote of no confidence in the American finance sector is going to collapse credit much further from this level of August 2009. That trend will be hyper-deflationary. The dollar will take the haircut, and balance things out a bit, but the credit collapse prevents inflation of the total money supply.

The credit collapse is the key to the inflation-deflation debate. Best to believe the Mish maxim which states there is no inflating out of the backside of a real estate bubble. So it is possible to take a massive hit to the currency yet still have deflation within the rules of our system…because of the collapse in credit.

Think: since 2006 we’ve already taken a big hit to the dollar, right alongside a huge deflation in asset prices (equity markets, houses, cars, boats etc)…because of the contraction in credit. I am simply saying that this dynamic continues to wind its course, which is much further from here.

Notice Sinclair passes off any higher gold price prediction than $1650 to Alf, or whomever. I think he’s smart to do so. Volatility will be extreme and Sinclair’s pegged $1600 area as the new future fixed gold price. OK, fine. But credit will be in a state of complete collapse by his target date of early 2011 (very few businesses or persons will have credit lines aka we have a cash economy). Meanwhile the oil price will face huge demand drop pressure and huge geopolitical pressure and not go through the stratosphere, and imported foods would face drastically lower demand and mostly disappear from shelves.

It’s all going to be extremely chaotic…and deflationary. I will stick with a prediction of a strong gold price in the neighborhood of Sinclair’s target in response to the credit collapse, plus an equity market collapse as a response to the credit collapse, plus a substantially weaker dollar (as foreign investor response to our credit collapse). That will be the new status quo. And, yes, the sum total situation will be deflation as defined by: Deflation = Reduced Supply of Money AND Credit.

At some point the oil price might reach say, $5, but it can’t stay that high for long. And the dollar can briefly rally again in the panic…but it’s going to take the big haircut and then stabilize at a lower “new normal”. It’s not 1970’s all over again, but it’s not the 1930’s exactly either. The dollar would’ve gone to the moon if this was the 1930’s and we were a manufacturing/producer/creditor nation. And, paradoxically, glossing over the differences between today and the 1970’s is also a big mistake. Mish’s deflationary real estate maxim is in play for the foreseeable future, and that card was not on the table during the 1970’s, and neither was our current insane level of debt and dependence on foreign creditors.

Also some will argue that future high interest rates will boost the dollar back up to the levels of the past decade…but remember that the dollar never returned to its pre-70’s level. Even after the Volcker era the dollar was dropped to a much lower “new normal” and stayed there for about three decades as measured in gold. Sinclair is smart to predict the higher “new normal” for gold.

I’m with Gary Paul. How can you have a 50% currency devaluation and price deflation at the same time? It seems that sellers (especially importers) would have to raise the prices of their merchandise to compensate for accepting the devalued currency.

&&&&&

Let’s see how many pricey things foreign producers can sell us at much higher prices. Inflationists seem to think that the supply of discretionary cash is infinitely elastic, even with U.S. unemployment running at (a reality-adjusted) 20 percent. RA

The current credit destruction rests on the notion, the Federal Reserve has no method to give “created money” to individuals. The Fed can only create money for the Banks. However, what happens if the Federal Government starts sending cheques to individuals using the IRS. This method would bypass the Fed, the Banks and the requirement of lending to create dollars.

&&&&

Why such niceties? The Fed could add three or four zeroes to everyone’s bank account. Apparently, they lack only the will to do so. Perhaps it’s because the cost would be catastophic: destroying savers as a class, as well as the bond markets. RA

Mish weighs in on the deflation side of real estate supply overhang

http://globaleconomicanalysis.blogspot.com/2009/08/zombie-subdivisions-and-pig-in-python.html

Senor says
“But the scheme is not within the Fed mandate and he will probably be impeached or arrested before he can bring his plan to fruition.”

[“Not within the feds mandate” is perhaps debatable, as the Fed IS allowed to print money when it “offsets” the tendered US debt (the fraudulent you for me and me for you thing).]

Putting that aside though, if Bernanke engaged in these illegal schemes to bolster the 7-year auction, then he did this to aid the federal government.
Why would the very entity (the federal government) being helped by this illegal action turn around and arrest the party helping it? There is absolutely no incentive for the federal government to pursue this illegal action, as they are a party to the crime.
And if not the feds, who else could or would?

If anything, Bernanke is making himself indispensable, by sopping up unsalable US debt (2nd term, HR1207, etc)?

Chances are, that a sizeable portion of the 500bil swaps were simply $ funneled abroad to make the buying of US debt appear as non-domestic.
[And lets not forget the “coincidence” of the dollar’s rise after the swaps were made. Maybe Ben sold a bundle of the swapped-for currencies in the open market to goose the dollar (how would he get them back… who cares…. that does not matter, the counterparty will forgive, if they were not the other half of the trade in the open market to begin with)]?

BTW, perhaps the distinction between debt-created electronic dollars and printed paper dollars is moot, considering that todays money by and large is the former kind?
The Netherlands are on their way to becoming the first country to virtually completely phase out paper money: the large banks will no longer receive or tender it, large chains will no longer accept it in payment, debit or credit card only. The Dutch are showing that only the former, and the ease of its creation, matters.

I would say let Jay Gould be your spiritual guide. If a market corner devoid of fundamentals can happen in oil and lay waste to a global economy when it finally blows out, then there are few restrictions over doing the same in the gold market.

With the exception that perhaps a devaluation of the world’s reference currency can only occur against gold, and that it may be desired or sought as a way out of the impending sovereign bond market rout.

When we dropped out of the inflation/deflation debate a while ago, we asked the inflationists to wake us when the price of suburban homes reached a quadrillion dollars. Wouldn’t that be nice for the fifty million or so Americans who owe more on their homes than they’re worth! Anyway, the topic continues to percolate in the Rick’s Picks forum, including this recent, astute post from “Senor Cuidado”. Like us, the Senor doubts inflation is lurking around the bend:

Tahoe Billy, you priced gold and eggs but you left out oil. Oil is key to the U.S. economy. With gold at $3,000, what is the oil price going to be?

-Gas will be 8 or 9 bucks a gallon; and people will pay for it, because they will have no choice just as they don’t in Europe already.

And how are Americans going to afford the new stratospheric oil price? You also left out any interest rate prognostication. My advice is to read bloggers Ackerman, Shedlock, Denninger et al. and get a handle on the financial reality of the massive real estate bubble: No economy in history has ever inflated out of a collapsing real estate bubble because the higher interest rates that accompany inflation paradoxically depress the real estate market even more; therefore, further economic contraction and deflation are assured.

-I suggest you read Jim Sinclair to understand that the dollar is on its way to a devaluation and what that means. Also, you aren’t up to date on your Denninger, because he is changing his tune about the prospects for hyper-inflation.

Printing Money Illegal

-That is utterly laughable. Don’t talk to me about legality in this kleptocracy where the rule of law has been made an absolute mockery of, especially as it (doesn’t) pertain to the financial infrastructure.

This dynamic is doubly inescapable in the USA because of the Fed’s creation-of-money mechanism, [the purpose of which] is to loan new money into existence. It is through debt creation that the money supply in America is increased, and there is no legal way to simply “print” money under current law.

-Once again, this is no argument at all in a nation where laws are either ignored, rewritten or simply interpreted to mean whatever the powerful want them to mean.

That is why there can be no inflation until all of the bad real estate debt is worked out of the system by, say, 2012 at the earliest. The bottom line is that our situation is not the 1970s all over again. The economic dislocations of the 1970s were not caused by a massive real estate bubble and a massive credit contraction; those were hallmarks of the 1930s.

-You are half right. It is not the seventies, though it should be instructive to anyone who reviews that period to note that the inflationary chaos that ensued occurred in the wake of Nixon’s closing the gold window and allowing fiat currencies to float. Pure fiat currencies generally last about 30 to 40 years before they self destruct. Well, it’s been approximately forty years now, and here we are on the eve of a dollar calamity. The U.S. is more like Argentina of approximately a decade ago then the U.S. circa the 1930s.

All that having been said, it is interesting that evidence of Bernanke’s attempting to print directly and circumvent the Fed’s legal mandate is indeed surfacing this week. (Check out Benton’s article at Financial Sense, Chris Martenson’s article and The Market Ticker entries for the lowdown on last week’s failed seven-year auction workaround that was apparently devised by our lawless Fed Chairman.)

-Yes, and not a damn thing has come of these revelations from the margins.

Consider the Lenders

If Bernanke can somehow get away with massive illegal direct printing of money, then that might be a game changer.

-He can and will, and it is a game changer.

But the scheme is not within the Fed mandate and he will probably be impeached or arrested before he can bring his plan to fruition.

-Don’t count on it.

But I doubt the game would change very much anyway: Money printing does not instill confidence in foreign creditors. All roads lead to deflation as Ackerman has described.

-This formula lacks some critical precision in my view. Hyper-inflation comes about because of a lack of confidence not the other way around. The lack of confidence in the borrower to repay-for whatever reason- leads to the necessity to print and buy one’s one reviled paper. What is more, a really crushing deflation will come after the crack up boom.

The future is deflation, systemic default risk and a ~50% currency collapse, along with a strong gold price measured in dollars. But no way in hell will the DOW blast to 15,000 (why not 30,000?) with sky-high interest rates…the banks wiped out…and half the country under water on their residential mortgages. The American business community is looking at a massive reset because this is the end of the “consumer economy” and the equity markets must reflect that ugly reality.

The future will look more like gold $1500 and DOW 1500.

-Yes, gold and the Dow will cross, but not at that price.

Of the 2 outcomes, (hyper inflation vs deflation) I’m hoping you are right with deflation. I wonder what trick they will do this time to avoid goldman sachs and all the others of drowning. That is for sure the thing they will do anything to avoid, even if the constitution has to be bended, distorted, hey they’ve done it plenty of time in the past, a few more times – what the heck.
I know all you wrote above is true and make the case for deflation. But that’s in the context of the current rules and the big unknown is what twisted trick will they do this time. In the 1930s, they declared gold illegal, forced americans to sell it at $20 and devalue the dollar to $35/ounce of gold. That allowed the bank cartel to survive. How high would gold need to go to do the trick this time? I seriously doubt they will let real estate in New York go down as much as 90% or so. They will buy all the congressmen if they need to in order to bend whatever rule. Well, an Obama unconstitutional executive order will be enough I suppose – as it was before.
an interesting read
http://www.gata.org/files/QBAssetManagement-07-2009.pdf