A Case for Deflation

[benjamind2010]

Let me assure you that nothing is getting any cheaper in the U.S. With the exception of housing, but adjusted for inflation and accounting for the increases in property taxes, insurance, and utilities, then housing is still likely becoming more expensive annually.

Governments may decide to hike tax rates. This will worsen the severity of the coming depression. They will inevitably remove the crutches that are propping up the markets. When the markets resume their decline in earnest, no amount of meddling will prevent a crash. Speculation will have to have weakened and the currencies will regain some of their lost value. This is easy to do, since the Fed can always withdraw it's QE and hike interest rates at will.

 

[Silverthorn]

Let me assure you that nothing is getting any cheaper in the U.S. With the exception of housing, but adjusted for inflation and accounting for the increases in property taxes, insurance, and utilities, then housing is still likely becoming more expensive annually.

Governments may decide to hike tax rates. This will worsen the severity of the coming depression. They will inevitably remove the crutches that are propping up the markets. When the markets resume their decline in earnest, no amount of meddling will prevent a crash. Speculation will have to have weakened and the currencies will regain some of their lost value. This is easy to do, since the Fed can always withdraw it's QE and hike interest rates at will.

Maybe maybe not. Rickards was a bond guy originally!

The projected U.S. deficit for fiscal 2011 is $1.645 trillion. This will be funded by new issuance of Treasury securities over and above the amount needed to refinance maturing debt plus interest payments on existing debt. About 60% of outstanding Treasury issuance is in the 2-to-10 year maturity range. If we assign the 60% weight to the $1.645 trillion of new debt, we get $987 billion of new 2-to-10 year maturity Treasury notes issued in fiscal 2011 to finance the deficit. Therefore, the Fed's buying power of $750 billion per year can monetize over 75% of the new 2-to10 year note issuance needed to fund ongoing U.S. budget deficits for the next two years without expanding the balance sheet.

http://kingworldnews.com/kingworldn...Jim_Rickards_-_QE_is_dead,_long_live_QE!.html

 

[flogbox]

From the latest newsletter, the view is that QE3 will not go ahead since the Fed. will try to put a halt to inflating oil prices which is becoming a counterintuitive side effect of QE II.

The lack of money from QE II is expected to lead to major slumps in the share market, commodities and in turn a re-valuing of the AU $. This all points to deflationary events about which we seem know the least about.

From what i understand, the US is not printing enough money to inflate their way out of the mess.

They can't print faster because it's destroying the USD, bonds and sending inflation of commodities skywards.

Give a break between QE2 and QE3 to let the markets correct and erase the recent surge in inflation. It will also strengthen the USD and the sale of US bonds. After that, the Fed can start printing again for another 1yr-2yrs.

 

[Agauholic]

From the latest newsletter, the view is that QE3 will not go ahead since the Fed. will try to put a halt to inflating oil prices which is becoming a counterintuitive side effect of QE II.

The lack of money from QE II is expected to lead to major slumps in the share market, commodities and in turn a re-valuing of the AU $. This all points to deflationary events about which we seem know the least about.

From what i understand, the US is not printing enough money to inflate their way out of the mess.

Id say they're giving it a red hot dip

 

[Clawhammer]

I heard on the radio this morning that the repair bill for this latest Japanese earthquake will reach $US35 Billion (sounds conservative) and that the Japanese Govt will pay for it by cashing in their US Bonds!

 

[flogbox]

They are definitely trying.

During each year they have printed the below fresh fiat.

2008 7.0%
2009 4.3%
2010 6.1%
2011 up until March last week 2%

In the 1970s they were printing double this. They are trying to inflate asset prices but it's not working as home values continue to fall.

 

[Dwayne]

I heard on the radio this morning that the repair bill for this latest Japanese earthquake will reach $US35 Billion (sounds conservative) and that the Japanese Govt will pay for it by cashing in their US Bonds!

Ha ha, I would bet that it's going to be a lot closer to $500 billion than $35 billion!

 

[Agauholic]

Nope... today they just squirted in 7 trillion yen

So thats $85billion USD.

Print mutherfs print.

 

[Guest]

They are definitely trying.

During each year they have printed the below fresh fiat.

2008 7.0%
2009 4.3%
2010 6.1%
2011 up until March last week 2%

In the 1970s they were printing double this. They are trying to inflate asset prices but it's not working as home values continue to fall.

You need to understand the exponential function to appreciate the number however flogbox.

The total monetary base in 1970 was chicken feed compared to today.

A 'growth' pattern of 7% annually will lead to a double down in 10 years.

So looking at how the exponential function works :

1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024, 2048, 4096, 8192...

You can see how very quickly, doubling down every 10 years can get out of control.

So say you have 1 trillion in 1970. Double down each decade to 2010, you're already at 16 trillion.

It VERY quickly gets out of hand from there and exponentially faster as well!

Another 20 years only - well within our lifetime - and US debt faces 64 Trillion.

Another 10 after that, 128 trillion.

See how it works?

It's already at the point where they can tax 100% of the income across the tax payers and still not even meet the interest on their debt obligation and they're just printing and spending more and more of it.

The USD is a chicken with it's head already cut off, flapping around mindlessly, not even realising it's already dead.

The only saving grace in the saga is that fiat still holds value enough to be traded for extremely depressed commodities like Gold and Silver at low enough prices for the common woman or man to buy and hold.

 

[Auagau]

flogbox wrote:

"2008 7.0%
2009 4.3%
2010 6.1%
2011 up until March last week 2%"

2008 = 1, base
2009 = 1.07
2010 = 1.11601
2011 = 1.18408
2012 (projected) = 1.29775168


...So up nearly 30% in 4 years, thats pretty massive. The first USD was printed in 1862 (149 years ago) and in the last 4 years (2.6% of the time frame) they have had to increase the monetary supply by 30%.

 

[Clawhammer]

on the milk case. i just dont see how every shop in australia sells milk. hello???? there are not that many dairy farms here in wa pumping that much milk. my little brain has been pondering this for a while. so where does the milk come from, diluted? plastic milk? imported? any answers?

Fair point... I wonder how much gets thrown out because it doesn't sell before expiry in a normal market environment? Maybe they're diverting supply from cheese, cream etc production.?

But the current milk war makes a fine "case for deflation".

The price deflates... businesses go bust, competition decreases and then the prices soar (inflation).

This happened in a 'particular city' in Queensland a few years back when fuel was rapidly increasing. All the local private tip-truck operators had to keep renegotiating their haulage rates with the larger civil contractors. It threw out contract costings and caused real problems for contract managers etc. A larger tip-truck operator kept their prices fixed and absorbed the cost and bought the trucks off the smaller guys as they went bust. By the time they had bought up 80% of the tip trucks in town they jacked their rates up well and truly over their normal profit margin... and there was nothing the major civil contractors could do... there was only 1 place they could go for tip-trucks!

 

[MelbBrad]

Ok, understood.

How do I prepare for deflation?
What should I be investing/hoarding/collecting?
What should I not be doing?

 

[goldpelican]

I'd say that's more a case of price deflation rather than monetary deflation. People often use the terms "inflation" and "deflation" with some disregard to these important differences.

So we're witnessing "price deflation" with bread, milk and now cereal in that they are cheaper to buy in outright dollar terms - but it is being driven by competition, not by a reduction in the overall monetary supply.

Nappies are the latest item I see being permanently marked down... Safeway in Vic has slashed the price of a box of Huggies from $42 to $33. That's a 21% price drop.

Might all be in the name of supermarket competition, but it's a deflationary effect for prices. Question is how long will the elastic stretch before prices snap back... or how much more will petrol go up as they let consumers save money from one purchase and screw them on another. Filled the Pajero up on the weekend - $120 for a tank of petrol. $1.609 a litre. Discount nappies suddenly don't seem such a good deal.

Thankfully we get about 2 or 3 weeks out of a tank of petrol

 

[Naphthalene Man]

Question is how long will the elastic stretch before prices snap back... or how much more will petrol go up as they let consumers save money from one purchase and screw them on another. Filled the Pajero up on the weekend - $120 for a tank of petrol. $1.609 a litre. Discount nappies suddenly don't seem such a good deal.

My solution... avoid supermarkets, join a co-op for your food, buy from the butcher and use modern cloth nappies! MCN's save you money in the longer run.

(sorry, just my little vent)

 

[hawkeye]

Ok, understood.

How do I prepare for deflation?
What should I be investing/hoarding/collecting?
What should I not be doing?

At first I thought it was obvious and that in a deflation you wanted cash, but now I understand it's a very up and down thing, I think due to the supply/demand issues that it causes. The relative certainty of the past is now going to be replaced by wild gyrations and I believe more and more people are going to look to certainty ie. Gold. Although Gold itself has and is going to go through it's own gyrations and silver even more so. Ultimately, you have to pay attention to what's going on and hoarding some essential items won't hurt.

 

[JulieW]

Well I'm voting for stagflation so the inflation component will be food, services and commodites, deflation will hit consumer goods.
So hoard, collect, store longlife food items and household essentials (soaps, disinfectants etc) and gold.
Avoid consumer goods like TVs etc. Also avoid Hire Purchase, Lay-By and credit card debts and mortgages.

 

[Guest]

Further to this, here's some valued reading on The Alpha Strategy which ties in with this discussion nicely.

In the late 1960s Pugsley entered the investment business, where founded a publishing company (The Common Sense Press) and wrote his first book, Common Sense Economics. It sold over 150,000 hardcover copies.[3] His second book, The Alpha Strategy (1980), was on the New York Times bestseller list for nine weeks in 1981.[4] Pugsley now distributes a PDF format edition of the book, free of charge.[5] Even after 28 years in circulation (as of 2008), The Alpha Strategy is considered a standard reference on stocking up on food and household goods as a hedge against inflation. This has made the book popular with survivalists.[6][7]

http://www.biorationalinstitute.com/zcontent/alpha_strategy.pdf

Recommended reading for any stacker and it's free.

 

[flogbox]

You need to understand the exponential function to appreciate the number however flogbox.

The total monetary base in 1970 was chicken feed compared to today.

A 'growth' pattern of 7% annually will lead to a double down in 10 years.

So looking at how the exponential function works :

1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024, 2048, 4096, 8192...

You can see how very quickly, doubling down every 10 years can get out of control.

So say you have 1 trillion in 1970. Double down each decade to 2010, you're already at 16 trillion.

Another 20 years only - well within our lifetime - and US debt faces 64 Trillion.

Another 10 after that, 128 trillion.

See how it works?

I don't disagree with what you said at all.

It's generally a print between 4% and 7% annually but they were doing 13%+ EACH year during the 1970s decade which is what caused rates to surge to 20% along with inflation.

The reason the 7% is not enough is due to fractional banking. $1T of central bank money is nothing compared to the $9T the banks can create from that base due to fractional standards and then loan out.

So when the assets purchased by the $9T start to decline, the central banks need to increase printing to crazy proportions to fill the outflow. A 7% increase on the central banks $1T doesn't look so hot against a 5% decline on $9T (just an example to make a point).


Although i could be completely wrong???

 

[errol43]

I am still going to bet on massive inflation before 2020.
There is no way can the USA pay back the $13T it owes without crashing the US dollar.\\

I will change my opinion if someone can show me how it can be done.

Regards Errol43

 

[Dwayne]

They could decide to default instead of try to inflate their way out of debt... not saying I think that's likely however