Inflation or Deflation?

[Alex Linder]

Preparing for the New Economy

by Bill Bonner

Waterford, Ireland – “America is beginning to consider a new stimulus program,” said Irish television last night.

It was a rainy day in the Emerald Isle yesterday. The wind was blowing. Rain was coming down. By 7pm, it was time for a pub and a drink. The Irish know what to do in the evening…

“Welcome to Ireland,” said the cab driver this morning. “Don’t you love this summer weather?”

It would have passed for a bad winter in Maryland. Cool. Wet. Disagreeable.

“What happened to that global warming?” asked a colleague. “It was supposed to make Ireland hot and dry.”

Meanwhile, back in the USA…people were wondering what happened to the stimulus program. It was supposed to stimulate.

Mr. Geithner says it is working. He says it’s “too soon” to begin thinking about another stimulus program. But every time we pick up a paper someone is voicing the need for more stimuli. And the things that really matter in the economy are going in the wrong direction: Jobs are going down. House prices are going down. Consumer prices are going down too.

This from Robert Reich’s blog:

“Recovery doesn’t depend on investors. It depends on consumers who, after all, are 70 percent of the US economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

“Problem is, consumers won’t start spending until they have money in their pockets and feel reasonably secure. But they don’t have the money, and it’s hard to see where it will come from. They can’t borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten homeowners is under water – owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can’t are hunkering down, as they must.

“Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can’t be built on replacements. Don’t expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don’t rely on exports. The global economy is contracting.

“My prediction, then? Not a V, not a U. But an X. This economy can’t get back on track because the track we were on for years – featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere – simply cannot be sustained.

“The X marks a brand new track – a new economy. What will it look like? Nobody knows. All we know is the current economy can’t ‘recover’ because it can’t go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin…”

These comments sound sensible enough to us. In fact, colleague Rob Parenteau has been saying something quite similar in these pages. “Over the last three decades,” he says, “we’ve taken one of the greatest industrial nations in history… and traded it off piece by piece. In its place, we became the world’s #1 shopping nation.

“Even now, we’re facing an economy in which 70% of our economic output depends on consumer buying. No buyers, no recovery.

“And yet, unlike other recent minor busts and even major corrections, the lesson hundreds of millions of strapped Americans are learning all over again is that same lesson our forebearers learned after 1929.

“Namely, that the law of personal and financial responsibility is as irreversible as the law of gravity. And it’s the egg that no bureaucrat – no matter how popular – and no multi-billion dollar bailout – no matter how large – can unscramble.

“In short, the hearts and minds of the American consumer have been thrown into reverse. And it’s this total psychological ’snap’ that will make a back-to- baseline conventional recovery impossible any time soon.”

After a night of heavy drinking in the pub…and pious reflection in our hotel room…we woke up worried. What if our friend Hugh is right? What if the comments above are right? Heck…what if WE’RE right?

The most critical question an investor faces today is whether he wants to smash up on the rocks of deflation…or run aground on the hard place of inflation. Posed the question – inflation or deflation? – we have always answered ‘yes.’ We will have both. But it is gradually occurring to us that we will have both more abundantly than we realized. As Hugh reminded us: we know of no case where quantitative easing has actually worked. It seems to work only where it is applied to excess – where the results are catastrophic hyperinflation.

The feds are more incompetent than even we suspected. They are trying to cause mild inflation – say, 4%…maybe 6%…even 8%. But they aren’t doing a very good job of it. Their efforts are too hesitant…they’re too worried about what the anti-inflation hawks will say…and about what the bond vigilantes will do. “What if the Chinese dump their Treasuries?” Yikes, that is too awful to contemplate. “Better go easy on that quantitative easing.”

The Chinese…unhampered by bond vigilantes [they are the bond vigilantes] or good sense…are increasing their own money supply three times faster than the United States.

Our Feds are trapped between the same rock and the same hard place as the rest of us. Either they run into the rocks of hyperinflation…or into the hard place of deflation. Just like Japan’s central bankers and finance ministers. They COULD cause inflation…but the price of it is too high. So, they take baby steps…boosting the money supply too little to offset the natural deflation of a major correction.

Of course, this is what makes us fear hyperinflation too. There doesn’t seem to be any safe channel between Sylla and Charybdis. If they are going to cause inflation…they have to really inflate the money supply. Not by 9% a year…but maybe by 900%. We don’t know what it will take; neither do they. All we know is that what they are doing now is not working. Prices are falling, not rising. Bond prices are rising – indicating that the vigilantes don’t think inflation is a problem. And the foreigners – notably, the Chinese – are still ADDING to their supplies of US Treasury debt.

So, dear reader, what should you do? Inflation could take much longer to arrive than most people think. A dull, sinking, dreary economy – like the weather in Ireland today – could be with us for years. The dollar could go up…gold could go down…for many moons.

Are you prepared to wait it out? We will leave you to think about that….

We’re still troubled by Hugh’s comments. The inflation narrative is “too easy to articulate,” he says. Too many people see it coming.

“The market clearly is not worried about inflation right now,” says colleague Chris Mayer. “That is the only way to explain 10-year Treasury yields of 3.30% as of last Friday. The deflationist view is the one that prevails. This view, which makes some compelling and elegant arguments, maintains that the credit losses far surpass the monetary and fiscal stimulus. All those trillions in destroyed debt, plus the yanking of credit from consumers and businesses, overwhelm new money creation.”

Many years ago, we looked at the danger of a “Japan-like slump.” We were early. We’re facing the sushi now. Falling prices. Big output gap. Rising unemployment. On again, off again deflation.

When we considered the risk a few years ago, we came to the conclusion that the United States couldn’t afford to wait it out the way the Japanese have. We have too many people who owe too much money to too many wobbly creditors.

But now we’re in it. The feds are propping up the wobbly creditors just like they did in Japan. The banks have gotten trillions in loans and guarantees.

The feds have been trying to prop up households too. They recently approved 125% mortgage refinancing by Fannie and Freddie. In other words, they now officially condone…and finance…underwater homeowners. If your house is only worth $200,000…and you owe $250,000…the feds will refinance your mortgage in full. No need to sell and take the loss. No need to let the banks foreclose. No need to face reality. Now…you can just stay underwater – indefinitely.

The feds are preparing to keep the whole economy on life support – with oxygen provided by quantitative easing. Eventually, of course, they’ll run out of gas. But that could be far in the future…

Government deficits are getting worse and worse. Tax receipts are falling. The US deficit for June came to $94 billion…a new record. And the budget deficit has topped $1 trillion for the first time ever. This is also exactly what the Japanese did. They ran the biggest deficits in history. And still the yen went up!

As we keep saying…inflation is no sure thing, at least not in the short-run. But Chris Mayer believes that “the problem with the deflation arguments long term, it seems to me, is that you are betting against a government’s ability to destroy its own currency. Governments are seldom good at anything, but one thing they are undeniably good at is destroying their own currencies. The dollar has lost 95% or so of its value since 1913. That’s a pretty darn good job. Other countries have been even more thorough.”

It takes a determined and suicidal central bank to pull off hyperinflation. Like the Central Bank of Zimbabwe, for example.

http://www.lewrockwell.com/bonner/bonner396.html

[Rick Ronsavelle]

Deflation in luxuries, inflation in survival stuff, like guns, ammo, and food.

If folks can't/won't borrow, money will be handed to them, or dropped from a hellicopter.

[Alex Linder]

'Printing money will lead to serious problems down the road,' says Jim Rogers

Fri July 17, 2009 11:20 am

INTERNATIONAL. Legendary global investor and chairman of Singapore- based Rogers Holdings, Jim Rogers said on Wednesday the US government’s interventionist economic policy verges on communism.

In an interview with Moneynews's Dan Mangru, Rogers said: "America now owns the car industry. America owns the mortgage industry. America owns a lot of the insurance industry. Karl Marx must be somewhere standing up in his grave cheering. And why is that? America has become a socialist and maybe even communist nation in many ways,” Rogers said.

Addressing the various stimulus packages introduced by the US government, Rogers suggested that President Bush approved two packages, President Obama one, and now there’s talk of a fourth.

“The first stimulus didn’t work. The second stimulus didn’t work. The third stimulus hasn’t worked,” he said.

Rogers is clearly unhappy with the massive monetary easing the Fed has engineered under Chairman Ben Bernanke and he sees inflation and a currecy crisis as a result of these policies

“Printing money has been tried many times throughout history in many countries,” he said. “It has never worked in the long term; it has never worked in the medium-term. Occasionally, it has worked in the short term.”

“Printing money is going to lead to serious problems down the road,” Rogers added.

The amounts involved are staggering, Rogers said. “They’ve already injected huge amounts of money into the system. The Fed has more than tripled its balance sheet in the past year or so.”

The federal government “has increased its own debt by four, five, six times,” he said.

In an interview with India's Economic Times Tuesday Rogers was asked what he was hiding in his pocket in reference to when, in a previous interview, he had a sachet of sugar in his pocket to underscore the point of impending shortage about agricultural commodities.

"I do actually have a silver coin in my pocket. I also have a gold coin, but the silver one is probably my better play. If I were a bright young man, I would be buying sugar now and silver, given the state of the world. That's not a recommendation, but I am just saying I do own some silver. Silver is cheaper than many things on a historic basis and I do own some silver," Rogers said.

Rogers reiterated his stance on the dollar and his expectation of a currency crisis.

"I am not terribly bullish on the dollar in long term. US dollars are a terribly flawed currency and down the road I hope I don't own any US dollars. I still own some of them at the moment, but it's not getting better for the US. The dollar any way is getting worse. The fundamental for commodities continue to improve. The fundamentals for the US dollar do not continue to improve. They are deteriorating."

"The world is full of currency imbalances and economic trade imbalances would have to be resolved or corrected, one way or the other. So, we are going to have some problems in the currency market. I don't know when." said Rogers.

http://www.bi-me.com/main.php?id=390...=62&cg=4&mset=

[Itz_molecular]

Originally Posted by Rick Ronsavelle

Deflation in luxuries, inflation in survival stuff, like guns, ammo, and food.

Bingo , somewhat .

Deflation in wages , houses (common ones ) , personal assets (stocks , funds , bonds ) and personal property (cars , appliances ).

Inflation in food , energy, medical care .......... guns and ammo ( if you can get them ).
Inflation in safe houses , far from urban chaos and non-whites . Also in productive land , crops or livestock .


Most of this money printing 'Quantative easing' ( what a jew term , must have set on the pot a long time , to create that one ). Seems to be flowing into the pockets of the ultra-rich and just passing everyone else .

Who says that you can't have both inflation and deflation , at the same time? It happens all over Latin America and Africa .

[Hugo Böse]

Originally Posted by Itz_molecular

Inflation in safe houses , far from urban chaos and non-whites . Also in productive land , crops or livestock .

I have a bit of trouble believing that agriculture will benefit as much as Jim Rogers wishes it would. Hypothetically, when there are economic hard times people will be less wasteful with their food and tend to buy cheaper food, particularly less meat, which requires a lot of investment and land to produce. In the developing world many people, who were previously working in the cities, will return back to the countryside where many may pick up small plot and subsistence farming again thus reducing the need to import food.

I also don’t believe there is a serious shortage of arable land, in Europe the governments have for years been paying farmers to leave their land fallow, if need be this land could quickly be put back into production. Finally, if farms were suddenly perceived as cash cows they would not long have problems getting loans for production.

[Kievsky]

Originally Posted by Hugo Böse

I have a bit of trouble believing that agriculture will benefit as much as Jim Rogers wishes it would. Hypothetically, when there are economic hard times people will be less wasteful with their food and tend to buy cheaper food, particularly less meat, which requires a lot of investment and land to produce. In the developing world many people, who were previously working in the cities, will return back to the countryside where many may pick up small plot and subsistence farming again thus reducing the need to import food.

I also don’t believe there is a serious shortage of arable land, in Europe the governments have for years been paying farmers to leave their land fallow, if need be this land could quickly be put back into production. Finally, if farms were suddenly perceived as cash cows they would not long have problems getting loans for production.

Yes, that's all true. But think of how these things will change the culture. If millions of people are gardening, they'll inevitably have thoughts like:

"Hmm, some plants are good, and many many others are bad (weeds). You need to kill the bad plants, so the good plants can thrive. Yes, yes, and maybe this applies to humans, too."

We have been "push-button" people for decades now. Hit the button, get the cheese. Most of us on this board don't remember anything different. Well, if your above scenario comes to fruition, we are going to have a very different world.

[andy]

In political terms inflation is good for spend as you go ethnics and very bad for prudent whites.However politically inflation is good for whites with a racial imperative.All said and done if the western governments had the trillions for the jew bankers then all economics are bunk.

[Itz_molecular]

Originally Posted by Hugo Böse

I have a bit of trouble believing that agriculture will benefit as much as Jim Rogers wishes it would. Hypothetically, when there are economic hard times people will be less wasteful with their food and tend to buy cheaper food, particularly less meat, which requires a lot of investment and land to produce. In the developing world many people, who were previously working in the cities, will return back to the countryside where many may pick up small plot and subsistence farming again thus reducing the need to import food.

I also don’t believe there is a serious shortage of arable land, in Europe the governments have for years been paying farmers to leave their land fallow, if need be this land could quickly be put back into production. Finally, if farms were suddenly perceived as cash cows they would not long have problems getting loans for production.

My error , I wasn't clear .
I generally tend to agree with your statement .
I wasn't thinking in terms of large commercial operations or export markets, but more in terms of a few acres to feed family and friends . The intrinsic value of self-sufficiency in food is priceless . To weather any economic or social turmoil with a full larder will always make the unbearable , bearable.
Being able to raise 'easy meat' , chicken , turkey , game fowl etc. is cheap and relatively easy compared to cattle and hogs .
The barter value of food can be very high , in times of social unrest .

The 'Green Revolution' has given us the historical first of high yields and an overabundance of cheap food . That puts a cap on runaway food prices .

Like you , I am skeptic of Jim Roger's predictions , but China is the wild card.

I remember Jim Roger's prediction that black rule in Zimbabwe would make that country an ideal place to invest .

He must know how to make money , but he sure doesn't know much about race.

[Marse Supial]

Originally Posted by Itz_molecular

My error , I wasn't clear .
I generally tend to agree with your statement .
I wasn't thinking in terms of large commercial operations or export markets, but more in terms of a few acres to feed family and friends . The intrinsic value of self-sufficiency in food is priceless . To weather any economic or social turmoil with a full larder will always make the unbearable , bearable.
Being able to raise 'easy meat' , chicken , turkey , game fowl etc. is cheap and relatively easy compared to cattle and hogs .
The barter value of food can be very high , in times of social unrest .

Agreed, with the exception of hogs. Beef cattle are tremendously expensive to raise; prohibitively so in a situation where one is trying to be self-sufficient with food. Unless you have sufficient grassland to sustain them, beef cattle require food suitable for humans -- primarily corn.

Hogs, OTOH, convert waste to pork. You can feed them anything -- apple cores, potatoe peels, chicken bones, milk that has gone bad, corn cobs and other such garden waste, and they convert it to pork.

[Hugo Böse]

Originally Posted by Alex Linder

“The market clearly is not worried about inflation right now,” says colleague Chris Mayer. “That is the only way to explain 10-year Treasury yields of 3.30% as of last Friday. The deflationist view is the one that prevails. This view, which makes some compelling and elegant arguments, maintains that the credit losses far surpass the monetary and fiscal stimulus. All those trillions in destroyed debt, plus the yanking of credit from consumers and businesses, overwhelm new money creation.”

On a recent Financial Times interview an English hedge fund manager was promoting a similar idea, the idea that deflation may be coming rather than inflation because central banks are not printing money fast enough, at the time I thought the guy was raving mad, however if you put into consideration credit losses those guys may have a point, on the short term in any case.

First deflation then inflation that is a fabulous formula to make people poor real fast.

If the deflation scenario comes around, counter to all the stuff you learned in college, on Kitco and from grandma´s stories about the depression, you may actually get fucked for buying gold, silver and commodities, that is a very unpleasant thought, to me all this means that no assets are really safe from heavy losses, that some assets can fall out of favor in the blink of an eye.

[Joe_J.]

A very dangerous thing occurred last Thursday and Friday. The Federal Reserve monetized roughly 40% of the nation's enormous debt. This means that the Fed printed money to flow into the economy in order to cover over 40% of the debt burden the U.S. now carries.

Within days the U.S. government quickly sold off this portion of the debt, creating even more debt, leading Treasury Secretary Timothy Geithner to request from Congress a lifting of the debt ceiling so that we could cover our obligations. That, of course, will create even more debt.

This economic shop talk may sound like gobbledygook to most average citizens, like myself. But the bottom line is that what the Fed did last week will create what is known as 'hyper-inflation.' The cost of goods and services rises so fast that average citizens can't afford the basic essentials of living.

However, the dirty little secret among economists and government bureaucrats is that what's bad for the citizens in this scenario is actually good for the government. In a hyper-inflation scenario the government makes more money due to the tax structure being based upon percentages. Thus, the government makes more money without having to enact an official tax increase.

In a free, Constitutional Republic, a very careful balancing act must be undertaken by government in this situation. The amount of hyper-inflation that benefits government must be carefully balanced with the tolerance level of the public for the ever-rising costs of goods and services, or else the citizens will vote out every politicians who contributed to this dastardly plan.

The salient point here, though, is that we are headed for a round of heavy hyper-inflation. We'd better get set.

But this is not the only troublesome area.

Many economists who closely watch the mortgage and housing markets are saying that we are going to experience yet another major crisis with foreclosures within the next year or two. The reason? Homeowners will owe more on their mortgages than their homes are worth on the market. One economist in particular stated on Fox News that this crisis will not only prevent a recovery but throw the nation back into a deeper recession or even a depression.

Barack Obama has stated, on the record, that the U.S. is 'out of money.'

For once in his life, he told the truth. We are broke. Yet at the worst point in at least 30 years for our economy, Obama and the Democrats wish to pass a 9 trillion-dollar healthcare plan, just so roughly 10 million Americans can have some insurance. And to boot, they want a cap-and-trade plan that will cripple business, decimate jobs, and add $1500-$3000 per year in extra energy costs to the average American family.

There are only 2 ways that the government can cover the costs of such a head-splitting load of debt, on top of the debt we already have. One is to raise taxes. The other is to print more money. Neither solution is acceptable. If inflation is headed through the roof, how will the citizens pay for more taxes? If the government continues to print more money, inflation will only continue to increase.

In short, the Barack Obama plan for the nation is a prescription for chaos. Some would argue we are already sliding into chaos without the healthcare plan or cap & trade. Obama and the Democrats have led us to a point in our history where the very survival of the Republic hangs in the balance. We are edging ever closer to a precipice, and if we fall off of it the Republic will be lost.

Obama and the Democrats who control Congress have given us snake-oil remedies that are leading us closer and closer to that precipice. Perhaps this is a slight hint as to why the citizens who shout at town hall meetings are so passionate.

And perhaps this is why the voices calling for a complete change in Congress, from top to bottom, are growing.


http://www.examiner.com/x-3704-Colum...ing-into-chaos

[OTPTT]

Does this mean that silver and gold will skyrocket? I've seen silver averaging around $14.75 an ounce the last few days.

[Joe_J.]

Originally Posted by OTPTT

Does this mean that silver and gold will skyrocket? I've seen silver averaging around $14.75 an ounce the last few days.

A lot of people predict that it will. When US Treasuries are not a safe haven, when the dollar is toast and the stock markets are now openly manipulated by Big Jew, there are not so many alternatives in the Kwa left, although I guess there is the Euro, oil, etc.

I buy silver as a SHTF purchase item. The only time I played the markets was when I sold off during $8 silver that I had bought for $4+/- to pay for my wedding. Otherwise, I buy and hold.

[Alex Linder]

China reduces holdings in US debt

China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury.

China holds more US government debt than any other country and cut its holdings of US securities by more that 3% in June, said the BBC's Chris Hogg.

Japan and the UK - second and third largest holders of US debt - increased their holdings over the same period.

China's holding of US debt is about 7% higher than at the turn of the year.

Inflation fear

In recent months the US government's budget deficit has widened thanks in part to the Obama administration's costly stimulus plan.

Our correspondent in Shanghai says that China is worried about this, and fears the stimulus efforts will fuel inflation in the US, reducing the value of the dollar.

This would then erode the value of the debt China holds in the US currency.

In June, China cut its holdings of US securities by about $25bn, a fall of 3.1%.

'Dollar alternative'

The sales were made as the US treasury secretary was visiting Beijing to try to reassure the Chinese that their investment in his country's government debt is safe.

In 2008, the Chinese increased their holdings in US debt by 52% over 12 months.

"China has said it would like to establish an alternative to the US dollar as the world's favoured currency for foreign exchange reserves," said our correspondent.

"So far there is no evidence that there is a suitable alternative. But these figures suggest they are exploring ways to diversify their investments where they can."

http://news.bbc.co.uk/2/hi/business/8207174.stm

[Joe_J.]

http://eclipptv.com/viewVideo.php?video_id=7958

[James A]

Hi

The inflation rate is so high in the world at this time but some countries can control this rate and mostly cannot control this inflation rate.

[RickHolland]

YouTube - Understanding Money and Inflation Part 1 (1 of 4)

YouTube - Understanding Money and Inflation Part 1 (1 of 4)

YouTube - Money As Debt (1 of 5)

YouTube - Money As Debt (1 of 5)

[Donald E. Pauly]

I see this happening in 2011 instead. Jews will be heading for Israel and Negroes will be rioting.

YouTube - The Day the Dollar Died

YouTube - The Day the Dollar Died

[Swede]

Remember that inflation and deflation can happend at the same time.