Deflation or Hyper-Inflation?
Ok so I've been trying to sort through all this economic madness lately. I've read as much as I can about Austrian economics, sound monetary policy, gold/silver investing, mainstream economic news, etc... But if I were given the opportunity to ask Ron Paul a question about this current situation I think it would go something like this:
So Dr. P, I'm kinda confused about some of this stuff and I need you to explain things to me like you are talking to a six year old. I have read many analyses of the current situation and I find the ones that seem to make the most sense to me are from Mish Shedlock's blog (globaleconomicanalysis.blogspot.com) and Market Oracle's website (http://marketoracle.co.uk/), among others.
They both advocate sound money, both have links to buy gold/silver and promote the precious metals, and Mish is definitely a fan of yours. So here is the problem. These articles and predictions are very well informed but most of them are predicting a Deflationary period comparable to the Great Depression. They base this analysis on the fact that credit markets are tightening even though the FED is injecting money into the marketplace. The problem stems from several areas,
1) Banks less likely to make loans because of the turmoil in the markets as they attempt to shore up their reserves (which may not matter anymore after the bill which just passed that knocks reserve requirements to ZERO from what I understand, is that right?),
2) Stricter loan standards accompanied by lower demand for homes due to the depreciating value of the assets and the thinking that if they wait a little longer the consumer can get a better deal on real estate, leading to huge supply of uninhabited homes in the current marketplace.
3) People thinking twice before buying things on credit because of the bad economic signs that are all around them. Americans actually starting to save again instead of spend.
All of the above cause domino effects within the economy which could lead to stores going out of business, to loss of jobs, to losing more homes, to home prices going down further, to higher unemployment, and on and on in a circle.
So Yes, the Fed can print money whenever they want and inject it into the credit markets but how can Hyper-Inflation happen if the main driver of money supply actually getting into the market (Consumer and Business borrowing on credit) is not in demand? If people refuse to take out loans how can we see Hyper-inflation? Won't this actually be Deflationary instead? What do the austrians say about tightened credit and deflation in a time of economic turmoil and government market intervention? The only way to see inflation in my opinion is to have many more Economic stimulus checks sent out to everyone in the country... YIPPEE FREE MONEY!!! will be heard all throughout the US.
Ok Doc, feed me some knowledge...
Can anybody explain why these analyses' might be wrong and what circumstances would allow us to see Hyper-Inflation vs. Deflation???
Still too early to know but ...
Deflation is more likely at this point.
You are quite correct.
M3 is the key.
We have had a massive decrease in M3, and the Fed cannot keep up.
I think we are more likely to have a deflationary depression than hyper-inflation.
Having said that ...
If the congress thinks a series of stimulus packages are the way to go, we could start to see inflation.
Also, if there is an abrupt turn around in confidence and the banks suddenly start lending again, we could see hyper-inflation.
You seem to have the right arguments.
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WAHOR!!
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* numbers
* the internet
Let's put them together and FIGHT the NWO!!!!
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Think CREDIT, NOT MONEY.
"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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In my opinion, when people engage in a theoretical discussion of what money is or should be, people get confused.
I think it's important to think in terms of CREDIT instead of MONEY to understand today's reality of the economy.
As far as I could tell, the economy is highly dependent on the credit that is created by the private sector. Now, it appears that a severe contraction of credit creation by the private sector is currently under away, and in my opinion, there is no way either the Fed or the government can make up the loss let alone over do.
Also, in my opinion, if foreigners dump U.S. dollars, credit creation should become much more difficult while huge U.S. dollar based debt obligations remain. This would accelerate deflation, in my opinion.
In my opinion, we are facing a major deflation.
government of the people, by the people, for the people
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Love Mish
I am a big fan of Mish. I've posted his website here several times and it didn't lead to much of a discussion. Ron Paul talks a lot about the Fed "trying to solve inflation with more inflation." So, am I to assume RP thinks we are headed for hyperinflation? To me, all signs point to deflation. Commodities, gold, silver, prices will come down. Banks will not loan much unless you have excellent credit. The banks will not make much money on people with great credit because those people pay off their bills quickly and don't give the banks much of an interest payment.
OK, to say we are headed for deflation goes against RP who says time and again we are headed for hyperinflation. But, the deflation case is so strong and all signs point in that direction.
Bottom line: gold is a terrible investment in deflation. Also, when everyone is doing it, it's time to get out.
Try Hussman Funds web site.
I think gold tends to do well in deflation.
"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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In my opinion, gold has a significant short term price fluctuation risk, but I have not been able to find a case that gold did not do well in deflation.
government of the people, by the people, for the people
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Truth is, I should not have
Truth is, I should not have said terrible investment in deflation. I think it is best to buy gold if you can sell high of course. I am in conflict right now. Here's a great article that terribly long, but good.
http://new.goldmau.com/article.php?id=559
Dr. Paul said
during the initial bailout vote that we're going to see more inflation if it passes. With the massive amounts of dollars being pumped into the financial system, there is no way to escape price inflation. A tsunami of dollars will likely come back to the US from foreign countries that currently are holding them as reserve currency. They will have to dump them because the dollar has been sacrificed. The inflation will probably be hyper-inflation. Dr. Paul has said in the past that we will most likely be plunged into an inflationary depression. Remember that the amount of money in circulation (I use the term loosely because it doesn't seem to reach Joe Average American) is based on the amount of debt. When debt is created, the money supply increases (inflation). As we eliminate debt, the amount of money in circulation will decrease (deflation). It's not going to be either/or. It will be an insidious combination of both. And we won't have much to say about it.
stagflation it's called
and you're right.
it's no longer either/or anything.
inflation and deflation
capitalism and socialism
democrat and republican
black and white
up and down
expect massive swings back and forth.
volatility will only increase.
it may be like being on an ocean in the middle of a tsunami
btw, the fed right now is engaging in massive currency swaps with foreign central banks. expect that the dollars that will be returned to the Fed to be 'destroyed'.
this is to counteract the massive outflows of capital into the commercial banks...who will most likely sit on the cash, just like the japanese banks did (and are still doing over 10 years after their crisis).
for the average american who is not able to tap into the global economy with ease, it's going to quite damaging.
in the end, the best suggestion may be to not be attached to anything, even gold or silver.
the only reason gold may be safe is because that is the Fed's ultimate backstop, and they're not going to go down without a fierce struggle to survive.
just a couple more cents to throw on the penny pile...
market oracle
I don't think there is a consensus over at market oracle. I read both sides.
you're right
should have been more clear, I was referring to an article I had recently read by Steve Moyer. It is very long but an excellent compilation of Market predictions that have come true since 05. He is predicting mass deflation including housing prices falling 50% to 90% from 05-06 highs, depending on location.
http://marketoracle.co.uk/Article6595.html
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Tis' it's natural manure" -T.Jefferson
T.F.Y.Q.A. - Think For Yourself, Question Authority.
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Tis' it's natural manure" -T.Jefferson
T.F.Y.Q.A. - Think For Yourself, Question Authority.
sounds convincing. One
sounds convincing. One question, How does asset devaluation affect the total money supply?
The answer lies in the unthinkable
How did Roosevelt get money into people's hands after he stole their gold? How did he get people back to work?
Massive government intervention into the market. Government 'make work' brigades.
How did Germany combat their rising unemployment and deflationary period?
Hitler.
Which route do you think we are likely to take, or are taking presently?
wow.
Excellent points, these jarred me because this never even crossed my mind. I can definitely see under an Obama administration mass public works projects and he has also called for forced national service by american youth (ala Hitler Youth). Under McCain we will most likely grow the bureaucracy of national security agencies including NSA, CIA, FBI, and especially Homeland Security. Soon most of the country's workforce will be employed by the government with the main job duty of spying on their fellow citizens. I wonder what the actual percentage is right now of gov't employees versus private sector of the total aggregate working population.
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Tis' it's natural manure" -T.Jefferson
T.F.Y.Q.A. - Think For Yourself, Question Authority.
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Tis' it's natural manure" -T.Jefferson
T.F.Y.Q.A. - Think For Yourself, Question Authority.
Actually
I was thinking more along the lines of FEMA forced labor to combat 25%+ unemployment.
But I guess my worldview is presently a little more cloudy that most.
I wish it were only as bad as more 'civil service' employees.
When you look at the Patriot Acts, Military Commissions Act, etc. I see only one path being followed.
I don't think our Hitler will be Obama or McLame.
I'm thinking someone else will rise up to 'solve' the crisis with a 'solution' that neither or those two waistoids could comprehend.
It will be really bad for a couple of years. Government will collapse.
The real demon will rise from those ashes. By then, America will be fattened and ready for slaughter - literally.
I read an article a few years ago
which stated that if you take all the federal, state, and local gov't employees, of all forms in all agencies and activities, that it was approximately 50% of the work force in the country.
That was a few years ago.
It is very likely at this time that there are more people working for the gov't than are productive workers in the US.
Don't forget the prisoners, either.
We have a lot of POWs of the drug war consuming tax dollars, instead of working and creating wealth in the market.
-jcr
"The problem with trying to child-proof the world, is that it makes people neglect the far more important task of world-proofing the child." -- Hugh Daniel
that is incredibly sad.
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Tis' it's natural manure" -T.Jefferson
T.F.Y.Q.A. - Think For Yourself, Question Authority.
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Tis' it's natural manure" -T.Jefferson
T.F.Y.Q.A. - Think For Yourself, Question Authority.
Presently, market intervention
Future, the powers that be want Hitler.
Both! We will probably see a
Both! We will probably see a deflationary recession in which the FED will seek to mitigate with even more inflation of the money supply bringing on an inflationary depression leading to hyper-inflation.
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Just a thought
I expect Yugoslavia is a better example ;)
explain
please...
good question
I have yet to see a good answer to this. When the Continental hyperinflated it was due to so much counterfiet actual paper money by small crooks and The Bank of England, angry that the colonies were printing their own currency. Paper money does not just disapear like electonic money can. Or does it?
Definitions:
1 Ever increasing supply of money = hyperinflation
2 Steady increase supply of money = inflation
3 No increase or deacrease in supply = flat
4 Steady decrease in the supply of money = deflation
Please give me an example of how numbers 3 and 4 could ever occur.
How does one decrease the supply of money? Would we all, including the Government quit borrowing? That is unlikely.
dollar history chart
http://upload.wikimedia.org/wikipedia/en/c/c9/Dollar_value_c...
We should do some more research on Zimbabwe, I am sure they have electronic money.
I have no answer, I am just thowing out some thoughts.
decreasing money supply
I'm not totally sure if these answers are 100% correct but from my perspective this can happen if:
1) Governments want to borrow but can't find creditors who are willing to lend because they already are too far in debt ( this could happen to us fairly soon)
2) people stop borrowing as much, cutting back on luxury items and saving only for necessities
3) Banks tighten extension of credit due to reserve problems
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Tis' it's natural manure" -T.Jefferson
T.F.Y.Q.A. - Think For Yourself, Question Authority.
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Tis' it's natural manure" -T.Jefferson
T.F.Y.Q.A. - Think For Yourself, Question Authority.
???
These all seem to stop the money supply from expanding but what actually removes dollars from existence?
Deflation = decreasing the money supply
I keep thinking back to the Continental scrip. After printing too many of them, they will be less valueable but who actually removes them from circulation? I can see that all of our assets are losing value, but there are still too many dollars out there. All assets have real value to them, but the dollar has none, so are the trends going to the same?