T Nation

Deflation or Inflation?

This is a carryover from another thread.

This is a pic from the Federal Reserve Bank of St. Louis. It suggests that the money printing is having no effect, as banks will not lend. Such a scenario is highly deflationary.

Looks like we have the perfect storm. Deflation on the supply side, inflation on the demand side

[quote]Headhunter wrote:
This is a carryover from another thread.

This is a pic from the Federal Reserve Bank of St. Louis. It suggests that the money printing is having no effect, as banks will not lend. Such a scenario is highly deflationary.[/quote]

It doesn’t matter if banks lend it or not, eventually the Federal government will spend the money.

[quote]John S. wrote:

[quote]Headhunter wrote:
This is a carryover from another thread.

This is a pic from the Federal Reserve Bank of St. Louis. It suggests that the money printing is having no effect, as banks will not lend. Such a scenario is highly deflationary.[/quote]

It doesn’t matter if banks lend it or not, eventually the Federal government will spend the money. [/quote]

I remember reading a pretty convincing analysis that by about 2012, every dollar of debt actually decreases GDP. In the 1950’s, one new dollar of debt increased GDP by a factor of 3, and by the 1970’s it was a factor of half. It means that eventually, increasing debt actually DECREASES/HARMS economic growth.

A slight shift away from increasing debt, in a system designed for ever-increasing debt, is a disaster waiting to happen. I’m beginning to believe more in a massive deflation, like air out of a balloon; and no matter how Uncle Sam puffs into the balloon, if its popped, it won’t inflate.

[quote]Headhunter wrote:

[quote]John S. wrote:

[quote]Headhunter wrote:
This is a carryover from another thread.

This is a pic from the Federal Reserve Bank of St. Louis. It suggests that the money printing is having no effect, as banks will not lend. Such a scenario is highly deflationary.[/quote]

It doesn’t matter if banks lend it or not, eventually the Federal government will spend the money. [/quote]

I remember reading a pretty convincing analysis that by about 2012, every dollar of debt actually decreases GDP. In the 1950’s, one new dollar of debt increased GDP by a factor of 3, and by the 1970’s it was a factor of half. It means that eventually, increasing debt actually DECREASES/HARMS economic growth.

A slight shift away from increasing debt, in a system designed for ever-increasing debt, is a disaster waiting to happen. I’m beginning to believe more in a massive deflation, like air out of a balloon; and no matter how Uncle Sam puffs into the balloon, if its popped, it won’t inflate.
[/quote]

If the dollar bubble pops every nation will get out of all their dollars, when that happens we will have a massive amount of dollars flooding the market at once. Deflation will be high in terms of gold and silver, but because there is so many dollar out their and all our debts must be paid back in dollars, we are going to turn on the printing press to pay the debt.

The dollar is done. Once the Commercial real estate bubble pops this year compounded with the 600 billion dollars guaranteed to enter the system next year, not including the 200 billion that is left over from tarp that is most likely to enter the system we are going to see people dump the dollar. People will run somewhere and it won’t be the dollar. It will be in real money, Gold and Silver.

Trade deficit highest in 10 months.

You know where I stand, HH

The biggest problem with deflation is that it is so relatively rare that virtually no one understands it. Bernake, the GP scholar, is so intent on avoiding it he is unintentionally steering the car straight for it. I guess it goes back to the law of unintended consequences.

Lets look at it another way. The majority of the worlds debt is denominated in dollars. And as I have said before, as bad off as we are in a lot of ways, we are still far better off than most. If things take another turn for the worse, countries and corps. will still try to service their debt. If they owe in dollars, they will seek to get dollars for payment. Not Euros, not Yen, not Pesos or Pounds. Dollars. They will sell us their products at ever more competitive prices to get dollars (deflation). They will sell assets at much discounted prices to obtain dollars. I could see oil starting to decline again to $50 a barrel and below. I’ve said repeatedly that gold is going to head fake everyone. I see it going back under $700 before any meaningful long term low.

I know a lot of you roll your eyes when you read this, but the prime driver of deflation, should we see it again, will be a massive change in societal mood. When people feel insecure, vulnerable, unsafe, they withdraw. They horde, they skimp and they save. They make do with less.

I am sure you have heard this saying, but it merits repeating. “It’s a recession when your neighbor loses his job. It’s a depression when you lose yours.”

As always, I hope this does not come to pass. I am not saying the sky is falling or the world will end. I just wish more people were aware of the possibility. As they say, “Awareness is curative.”

[quote]John S. wrote:

[quote]Headhunter wrote:
This is a carryover from another thread.

This is a pic from the Federal Reserve Bank of St. Louis. It suggests that the money printing is having no effect, as banks will not lend. Such a scenario is highly deflationary.[/quote]

It doesn’t matter if banks lend it or not, eventually the Federal government will spend the money. [/quote]

They won’t be able to keep interest rates down for ever either. Interest rates float and money will start flowing. Side benefit is that it will be flowing to only those that can make the most efficient use of it.

Interesting article. The following was a small but interesting segment;

Buy the U. S. dollar. Despite drawbacks, “the dollar remains the world’s reserve currency and safe haven, regardless of suggestions by the Chinese and others that the dollar should eventually be replaced by a global currency.” How about gold? Fuggetaboutit. Never. “The recent strength in gold prices suggests that many investors distrust all currencies.” But “the supply of gold is far too small, even at current prices, to again serve as money. Gold in private and government hands is worth about $5 trillion compared to global M3 money supply of $60 trillion. Gold would have to sell at $32,128 per ounce, vs. $1,097 at present, to replace the M2 money supply dollar-for-dollar.”

That’s good information to have posted.

In some earlier thread I tried estimating this ratio but was only able to come up with money supplies of various nations rather than a global figure. So I only had a rough estimate, but the same conclusion: there isn’t enough gold for the idea to be practical.

Someone (I’m sorry, but memory is not as good as it once was) had an objection and proposed workaround which was not remotely specific, but if I was able to extract the kernel of their idea correctly and make it more specific, it was that hypothetically a global currency could be backed at a fractional reserve rate of for example 32 to 1.

E.g., a bank or government would be obligated to produce on demand an ounce of gold for a thousand “dollars” of this currency, but in fact reserves would be only 1/32 of an ounce, and the bank or government would not be able to issue added amounts of currency unless acquiring an ounce of additional gold per 1000 “dollars” of currency.

I have not, for lack of skill as well as time, remotely given that the analysis it would require as to whether it could work. I doubt it due to some difficulties in transition that seem possible.

Gold wouldn’t be the only thing, there is also silver to consider. Plus we have oil and other things we can use to value our dollar.

When people talk about gold as a currency they are also talking about all precious metals and natural resources.

So while the information you gave may be correct, it is only using one piece of a Gold based system.

So which politicians or behind-the-scenes-powerful bankers are showing signs of creating such a system, anywhere in the world?

Or for that matter let’s say, which corporation with some significant (for ordinary purposes) financial clout such as having at least $10 billion cash on hand? If imagining a private creation of such a thing.

[quote]Bill Roberts wrote:
So which politicians or behind-the-scenes-powerful bankers are showing signs of creating such a system, anywhere in the world?

Or for that matter let’s say, which corporation with some significant (for ordinary purposes) financial clout such as having at least $10 billion cash on hand? If imagining a private creation of such a thing.[/quote]

Someday, no one will accept as money anything that can be abused by government. On that day, government will revert to its original purpose…until a couple of generations pass and someone revives the idea of getting something for nothing.

Afterall, look how quickly we destroyed our Constitution and reverted back to barbaric forms of government, government by extortion and violence.

Wasn’t the original purpose of government (in general, as opposed to perhaps one specific government) for the powerful to control society?

[quote]Bill Roberts wrote:
Wasn’t the original purpose of government (in general, as opposed to perhaps one specific government) for the powerful to control society?[/quote]

NO!, government was created to give everyone everything for free. Don’t you know anything.

[quote]Headhunter wrote:
This is a carryover from another thread.

This is a pic from the Federal Reserve Bank of St. Louis. It suggests that the money printing is having no effect, as banks will not lend. Such a scenario is highly deflationary.[/quote]

The Money multiplier is decreasing because the currency drain is increasing. The savings rate of the public is increasing and companies likewise are hoarding cash. So the monetary base has to be increased by an exaggerated amount. These are inflationary factors, but won’t mean much in the short run because of all this slack in the economy. As long as the fed can end quantitative easing and begin to drain excess liquidity appropriately (which is optimistic), then inflationary pressures should be quelled. Deflation is not likely.

[quote]ChrisL912 wrote:

[quote]Headhunter wrote:
This is a carryover from another thread.

This is a pic from the Federal Reserve Bank of St. Louis. It suggests that the money printing is having no effect, as banks will not lend. Such a scenario is highly deflationary.[/quote]

The Money multiplier is decreasing because the currency drain is increasing. The savings rate of the public is increasing and companies likewise are hoarding cash. So the monetary base has to be increased by an exaggerated amount. These are inflationary factors, but won’t mean much in the short run because of all this slack in the economy. As long as the fed can end quantitative easing and begin to drain excess liquidity appropriately (which is optimistic), then inflationary pressures should be quelled. Deflation is not likely. [/quote]

Why would they want to do this? Why not just leave the market and the money supply alone? Or maybe this is what your are advocating when you say “end quanitative easing and begin to drain excess liquidity”? When you put it like that, it sounds like more tinkering.

Keynesian tinkering is what has us in this mess. I would have to re-read Sir Maynard to speak with any authority on this, but I beleive his followers have taken monetary manipulation much further than what was advocated by the man himself. These guys are completely out of control and further manipulation is not going to help us.

True that “tinkering” has been taken to an extreme lately. But that should be put in the context of the situation we’re in. We’ve had a central bank that didn’t work to create liquidity in a financial crisis before and the Great Depression happened.

Back to the multipliers…

When you artificially set prices low, you get shortages of supply. This is a very simple and well known economic truth. They can obviously manipulate the supply side to counteract this, but it seems they may have reached the point of rapidly diminishing returns. When you sent interest rates low, you discourage deposits in interest bearing accounts, and you discourage lending of said deposits(unless commercial rates are always x% points more than the discount rate). This will effect both factors in the multiplier.

I am not all that convinced that I really give a shit about the multiplier. If deposits were up but the multiplier were the same, you still have more money being lent. If deposits were down but lending stayed the same the multiplier would look better, but you still have the same amount of money being lent.

It seems to me that if you wanted more money for investment you would encourage more deposits or more lending. You could do both by letting interest rates float. Deposits would increase if they actually provided a return, and banks would be more likely to lend with a greater return. Presto.

I have not been able to sort through the negative side effects the fed NOT setting the discount rate. Anyone care to offer suggestion so I can work through it? I am stuck. I just don’t see the long-term downside to letting the market set interest rates.

[quote]ChrisL912 wrote:
True that “tinkering” has been taken to an extreme lately. But that should be put in the context of the situation we’re in. We’ve had a central bank that didn’t work to create liquidity in a financial crisis before and the Great Depression happened. [/quote]

I am not sure I agree with this. Rothbard has a pretty good lecture(maybe it was a book?) on monetary policy from '21 to '29, and it’s role in the '29 crash. I honestly don’t recall the particulars, so I guess I will not be refuting this any detail. I believe the Fed was setting discount rates, buying gov’t securities, and extending credit before '29. I’d have to do a bit of digging.