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FED Fighting Off Deflationary Depression (Jan. 22, 2008)

The FED cut rates .75% today as Worlwide stock markets deflated. They want to increase the money supply because they fear deflation.

Our money is entirely create from debt. If ALL debt was retired in our country, there would be NO money. Deflation is defined as a reduction in the credit/money supply. Everytime a loan is created it increases the money supply. Once that loan is retired, the money that was created is also retired.

This would all be different if the money was actually printed. But only a very small fraction of money created is actually ever printed. Only the money needed to carry our day to day transactions is printed. Near ALL of our money is nothing more than book entries, or today, a computer entry.

Our fiat debt based money system REQUIRES inflation. If you go and buy a house on debt, at first you may have a hard time affording it. But due to inflation your wages increase and after a few years your mortgage payment becomes less and less of a percentage of your income. Same with the government. They borrow, get in over our heads, but they know that due to inflation their revenues will increase. So this HUGE debt, in theory, becomes less and less percentage of revenue.

Currently the subprime markets are seeing increasing defaults. Remember, when a debt is retired, it decreases the money supply. That computer entry that created the money is now zero. That money is gone. Into thin air, from which it came. Debt can also be retired by default or a debt being forgiven. So massive defaults are deflationary, they take money out of the system.

Lately the FED has lost its control, and Greenspan has openly talked about this in an interview a couple months ago. When he dropped rates to near zero, mortgage rates followed. But recently as rates have been increased, mortgages did not follow. Mortgage rates did increase but not proportionately to the previous decrease.

For those who remember, in 2002 Greenspan was talking a lot about "the risk of deflation" to our economy. This was the purpose of cutting rates to near zero. This was to encourage borrowing. Borrowing increases the money supply. At the same time, for those who remember, Bush issued tax rebates. Another increase in the money supply. Both are only temporary bandaids, and result in a larger problem later on (which is nearing).

So inflation is kept going to avoid deflation. Inflation is a increase in the credit supply, increasing debt. To increase debt REQUIRES 2 things. A WILLING BORROWER and a WILLING LENDER. When the banks lose confidence, they stop lending. When borrowers lose confidence, they stop borrowing. This is what controls the FEDS effectiveness. The FED lowers and raises rates to encourage/discourage lending. But this is their only control, they can't fully control the emotional side, the confidence equation.

In 2001 as the recession set in, the borrower lost confidence in borrowing, as is normal in a recession. Lower rates persuaded borrowers to borrow. Borrowers are not as smart as lenders, and more easy to persuade into borrowing. With lower rates borrowers were persuaded to buy new, bigger houses. They cashed out equity in their homes for consumption. And the money supply inflated, the desired goal.

This time around, as the subprime markets crumble, the Lenders have lost confidence. The FED has been injecting 100's of billions into the credit markets. But the credit markets have still stopped a large portion of lending. They are holding onto the cash as they fear that as this unwinds they may need it to cover their ASSetts. This failure to persuade Lenders to lend, combined with increasing defaults, is resulting in a failure to inflate and leading to deflation.

Bushes Tax Rebates. Bush is borrowing for us, increasing the money supply, to avoid deflation. He is borrowing for us because, well because he can, and we can't. When I say we can't I'm referring to the banks loss of confidence, they have cut back significantly on lending. When deflation rears its head, SOMEONE has to borrow, increase the money/credit supply, to inflate.

Fiat debt based money systems are ALL ABOUT ever increasing debt. Without it, they collapse into deflation through defaults. Deflation results in falling prices, wages included. As prices fall, there are less profits for corporations and corp. debt defaults increase causing further deflation. Wages drop resulting in large defaults in consumer debt further increasing deflation. At this point BOTH borrowers and lenders have lost confidence. Deflation continues to spiral downward until most debt has been cleansed from the system, and someone starts borrowing again. This someone is usually the government and usually to finance a war. The USA has gone though 4 depressions since its inception. Near the bottom of all these depressions you find a war followed by economic recovery. The larger the depression has been, the larger the wars have been.

Note: If the FED starts actually printing all the money, then we're in for hyperinflation, as once the money physically exist, it does not dissappear when a default occurs as it does currently. Germany, before they totally collapsed, was printing physical moeny so fast the they started printing on only one side of the bill, to speed up the printing. The back side of their bill was blank.



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Over a year ago when I first

Over a year ago when I first posted this, most argued hyperinflation in response to it. What do y'all think now???

Deflationary Depression, or Hyper Inflationary Depression?

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"Ehhh, What's ups Doc?" Bugs Bunny
"Scwewy Wabbit!" Elmer Fudd

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

With this past weeks Market Crash

A lot more people have a whole lot less money. A lot of people have already been getting laid off from their jobs, which is equivilent of wage reductions. Many of these people will now be living on their 401k funds, and many of them are getting really wiped out. Overall, the people are having less money. Those holding cash will begin to see the VALUE of their cash increase, as more cash is being destroyed in ALL asset classes.

Look at ANY recession. What you always find is that as one asset class falls, there is always one to be found that is going up. Money moves from one asset to another. Not so currently, as ALL asset classes are falling.

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

Republicae's picture

The FED will INFLATE, that

The FED will INFLATE, that is the only trick they have....and in fact, last night they loosened the restrictions that were placed on "in-house" lending back in the 1930s where a savings bank owned by an investment bank or group or vice-versa can lend from the savings (the people's deposits) to the investment bank of the parent company. This, of course, will blend the risk from the investment side to the commercial banking side.

“Men do not willingly read unpalatable truths of themselves. The people like those best who fool them most by pandering to their vices and flattering their foibles”—Admiral Raphael Semmes.

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

Today the FED held rates steady

because maintaining Confidence is currently the number one concern to effect inflation, not rates.

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

Republicae's picture

The FED/GOV really has only

The FED/GOV really has only two options, it can either allow for massive deflation or it can inflate to the point that the over-burdened debt load will balloon even more. Either way, it doesn't look good.

“Men do not willingly read unpalatable truths of themselves. The people like those best who fool them most by pandering to their vices and flattering their foibles”—Admiral Raphael Semmes.

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

There really is only one

logical choice. They can't inflate, lowering rates only encourages inflation, it does not guarantee it. The only way to guarantee inflation is to start physically printing monopoly money. That results in Hyper inflation and ends in full destruction of the currency.

Then there's the only logical option, Deflation. Tell all the foreigners, "Oops, sorry about that..." and hope they don't invade...

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

Republicae's picture

They will INFLATE!!!! They

They will INFLATE!!!! They will not allow the economy to deflate, watch them drop the rates! It's because they have nothing else they can do, they know nothing else to do so they will lower rates and try to inflate the economy out of a deflationary slump. Yes, the destruction of the currency is on its way. The massive inverted debt pyramid will become even more top-heavy.

“Men do not willingly read unpalatable truths of themselves. The people like those best who fool them most by pandering to their vices and flattering their foibles”—Admiral Raphael Semmes.

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

They will TRY to inflate

As you posted on another post, US's credit rating has been lowered. This results in fewer willing lenders. Would you loan all of your money to AIG right now? Most would say no. And the ones that are loaning them money are not doing so because they think its a good investment, they're loaning them money to try to save their own butts from a domino effect. Do you think these people are going to loan money to the local Mom & Pop Credit Union that is over extended? No, only the one that are "too big to fail". But there is enourmous threat from all these little guys when you put them all together, and the little guys are in just as much of a hole as the rest. A large group of small failures leads to another of the bigger players falling, and it keeps going. Cleansing the excess debt from the system. It is history repeating, its all happened before.

No, the FED will TRY to inflate. But the FED has NEVER been omnipotent. They have saved the economy in some situations that looked dire, and that has presented people with the ILLUSION that they can inflate at will. But the FED does very little inflating. They set rates. The lending and borrowing is the creator of the inflation, not the rate. The rates encourage/discourage lending/borrowing. But rates are not the only factor of lending/borrowing. Confidence overrides rates. Principal preservation is the first concern of lenders, the rate of return is after that. During good times principal preservation is taken for granted, but we're not in good times.

They WILL TRY to push that string though.

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

Republicae's picture

At the moment, the

At the moment, the FED/Treasury maladjusted child of THE STATE is attempting to push a very inflated bubble, we have not seen this massive bubble bust or even deflate at this point. What they are doing now is simply pushing on one side of the bubble and, in effect, distorting it in a variety of areas that are not even evident at the moment. The “unintended consequences” of their actions are where most of the dangers lay. These massive bail outs are indeed inflationary for it does is simply layer another level of monetary creation on various investments, such as MBSs, which at the time of their creation also placed a layer of newly created money into circulation. The writedown of the investments themselves are not deflationary because the money that was created by those initial mortgages has already been circulating through the economy, and the actual investments only represent future earnings, money that would circulate back into those investments as a debt payment. Anytime a debt is paid there is a corresponding contraction in the money supply, but if the debt is never retired, but simply written off as a book entry then it does not deflate or contract the money in circulation. Since it appears that the MBSs have been a major problem in the credit sector, we must understand that what is taking place is another slathering of monetary paint which will be inflationary.

So, as the FED creates these hundred’s of billions of dollars, or if we are realistic we should know that any bailout will end up being TRILLIONS of DOLLARS the overall debt burden will be heavy in the extreme. Once again, I believe we will see an inflationary depression, with deflationary sectors throughout the economy until the entire monetary system reaches its terminal point, at that time the whole house of cards will tumble down.

Rags make Paper; Paper makes Money; Money makes Banks;Banks make Loans; Loans make Beggars; Beggars make Rags

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

Don't forget that the Fed is the "Lender of Last Resort"

Lehman Bros going under is deflationary, but the US government taking over Fannie Mae and Freddie Mac is not. Ditto for the UK government and Northern Rock.

I recommend the following article on the Money Supply.

http://en.wikipedia.org/wiki/Money_supply

Remember that M0 is the measure of legal tender in circulation. M1, M2 and M3 are measures of the "money" created by the banking system.

Don't be fooled by Paul Grignon's "Money As Debt" videos. Grignon advocates a state banking monopoly with a fiat money supply. Hardly a Ron Paul Supporter!

-"Ron Paul cured me of my predilection for Che Guevara T shirts."

What makes you think that the Fed is on our side?

"Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." Benjamin Franklin
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I'm much more concerned about their willingness going forward than their options.

government of the people, by the people, for the people
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Republicae's picture

It is all coming down

It is all coming down folks...prepare yourselves, even mainline economist are now saying that the debt and monetary system is killing the economy of world, starting in the U.S.

“Men do not willingly read unpalatable truths of themselves. The people like those best who fool them most by pandering to their vices and flattering their foibles”—Admiral Raphael Semmes.

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

Crude Oil

Drops below $100.

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

TxRedneck, this one is for you.

"Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." Benjamin Franklin
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This is related to what I was going to tell you before. I'm sure you can find the data.
http://www.depression2.tv/d2/node/181#comment-850

government of the people, by the people, for the people
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"debt is really a 'dollar short' position"

"Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." Benjamin Franklin
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Inflate Or Financial Tsunami by JayTaylor
http://www.gold-eagle.com/gold_digest_08/taylor090608.html

In the article, Jay Taylor wrote,

I can’t help remembering Bob Hoye’s constant refrain that when the global economy runs into trouble, the senior currency gets stronger. Why so? Bob reasons that debt is really a “dollar short” position. When the debt has to be repaid, everyone scrambles to sell assets and buy dollars to answer the call of margin clerks.

government of the people, by the people, for the people
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Wholesale prices report today,

wholesale prices fall for the second month...retail to follow soon.

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

WOW! That was a pretty sobering assessment

"Evil flourishes when good men do nothing."
—Edmund Burke

Depressing But TY for the post

glad CNBC is willing to have him on air

What is the recovery path that least affects the people?

I keep see that wages and jobs are affected by inflation, deflation, confidence, etc.

Most people are living paycheck to paycheck...any big move by the people against the Fed would likely result in massive overturn in housing, increase in crime, and increase in homelessness/death. It's as if the Fed is going these people as randsom...thus, the government and Fed actually care to some extent.

What would be our ideal path that affects the people the least?

We say we want to get rid of the Fed, but how? Do we just say "Fed, you are banished. All the money we used to owe you, we no longer owe you. And if you try to screw with our economy like you did before when Andrew Jackson 'killed the BANK', we'll kill you."

I'd like to pitch DaveRamsey.com yet again. If we can get less people living paycheck to paycheck, out of debt, and stay out of debt, the Fed loses their grip on our government. And this would be done so slowly it wouldn't result in deflation...but even if it did, it wouldn't be so bad. Everything just costs too much including our salaries. We need everything to go down simultaneously.

Everything is

going down simultaneously, including salaries. Most of the salary reduction is coming in the form of layoffs unfortunately...

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

Well, it should now be obvious to all,

uhhh, except the ones living on the banks of De Nile, that we are infact seeing deflation. All class of Commodities are down, Stocks down, Bonds are flat or Defaulting, Real Estate still falling. We should begin to see this filtering into retail prices soon.

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

Inflation vs. Supply and Demand

Inflation is an increase in the money supply.

Supply and Demand create prices. More demand or less supply drives prices up.

But one has to look to the overall consumper price index to find deflation vs. inflation. Prices are a side effect - not as a cause.

Understanding the situation is important, but I see no solutions

"Let's get rid of the Fed!" as yanking it off like a bandaid is not a real solution ... or is it?

Legalize Competing Currency

The answer is to legalize competing currency and let the people/market determine the best solution.

Then, the FED will become just another competing bank.

Investment will once again be funded by actual accumulated savings, not fiat - producing slow, but steady growth.

_______________________________________________________
"Let the good heart speak words of true peace, not inciting others to further war." -- B.I.S.

Inflation also in China, India, Europe

March 11 (Bloomberg) -- China's inflation accelerated to the fastest pace in 11 years as the worst snowstorms in half a century disrupted food supplies, adding pressure on the central bank to raise interest rates.

March 20 (Bloomberg) -- India's inflation accelerated to a ten-month in the first week of March, making it more difficult for the central bank to reduce interest rates to bolster slowing economic growth.

Wholesale prices rose 5.92 percent in the week ended March 8 from a year earlier, faster than the previous week's 5.11 percent, the Ministry of Commerce and Industry said in New Delhi. A Bloomberg survey of 13 economists forecast a 5.11 percent gain.

March 3 (Bloomberg) -- Europe's expanding economy is helping buy Jean-Claude Trichet time to overcome the region's worst bout of inflation in a decade.

Signs are mounting that growth is holding up in the 15 nations that use the euro, fueled in part by demand for exports in eastern Europe and other emerging markets. That gives the European Central Bank's toughest inflation-fighters ammunition to block any push for lower interest rates.

TIPS Trading NEGATIVE = Inflation

March 10 (Bloomberg) -- Bond investors have never been so sure that the Federal Reserve will lose control of inflation. They're so convinced that they're giving up yields just to buy debt securities that protect against rising consumer prices.

The yield on the five-year Treasury Inflation-Protected Security due in 2012 has been negative since Feb. 29, and traded today at minus 0.17 percent. The notes, which were first sold in 1997, have never before traded below zero. Even so, firms from Deutsche Asset Management to Vanguard Group Inc., the second- biggest U.S. mutual fund company, say TIPS are a bargain.

For the first time in a generation, money managers must come to grips with a central bank that's more intent on spurring the economy than restraining price increases. With oil above $100 a barrel, gold approaching $1,000 an ounce and the dollar at a record low against the euro, TIPS show investors aren't convinced Fed Chairman Ben S. Bernanke will be able to tame inflation once policy makers stop cutting interest rates.

I find these things really interesting,

did you read this thread "Chart" that nalicosh posted earlier today? The "Experts" are often wrong, or have their own motives-interests. Don't forget, management companies are in dire straits right now, and in such times dire mistakes are made. When things are running smoothly they look like Gods, when turbulence prevails they look to be fools. They have been fools for the last 8 years, and the public is BEGINNING to see such.

http://www.gold-eagle.com/editorials_01/seymour062001.html

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

This is an extremely important discourse

TxRedneck, this reads as though you wrote it yourself. And if this is the case, you clearly give a good name to what I presume you wish to represent: Texas redneck. You've made a great case for falling prices from not enough dollars chasing the goods and services produced.

You've described, exactly, the way things are. In my mind, the question is whether or not during this deflationary cycle that we completely jettison the fiat system. If so, the exact one thing that will not deflate are the commodities.

Fiat systems have been jettisoned in the past, and as infrequent as they are, it is a certainty that it will happen again...

With China, India and Russia entering the world's marketplace... who are starved of gold and starved of protein (and therefore wheat, corn, soy, sugar who feed the livestock), the US is no longer in a position to edict what is to be done with the fiat currency.

I'd like to hear your thoughts on how a dislocation in the markets play out.

In my opinion,

and I'd like to emphasize I believe, we are already in deflation. Many argue "yeah, have you been to the grocery store lately?"

Prices for automobiles began falling in 2000. I bought a Toyota Tacoma in Dec 1999 for $22,000. Six months later the same EXACT truck was $20,000. Stocks prices began falling in 2000 (funny how rising stocks are not considered in the inflation indexes...). REAL prices on houses began falling in 2001 ( funny how rising real estate prices are not considered in the inflation indexes...).

Why do people not see deflation? Because commodities are inflating. And as of late, that is about the only thing inflating. Food and energy, and metals. Metals are going up PURELY on emotion, fear and greed.
So that leaves food and energy. And the switch to methanol explains largely these rises. More land is being used for methenol production resulting in less food, so groceries prices rise. Methanol is more expensive than petro gasoline and less efficient, so gas prices rise. Methanol is what is keeping prices inflated, in my opinion. It is a sneaky equivilent of Franklin Roosevelt's distruction of crops and livestock in order to keep prices up. Land for food has been converted to land for fuel, reducing the available food supply for livestock feed and grocery stock. It has reduced oil consumption, which is why we see oil at $100 a barrel producing gasoline for the same price it did when oil was $70 barrell.

With less food being produced food shortages are a real threat. With less food available we could see Deflation all around but high food prices. If there is not enough food for everyone then then ones who can afford food are the ones whom eat. BUT. As people need to eat they will consume less energy, and the price of corn (methanol) drops below the price of food crops, farmers convert to growing food. The end result is the market decides, and food in the end is more valueable than fuel. Falling fuel prices will lead to falling food pirces. And once again, this is what I believe.

----------------------------------------------------------
"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence