Problem of 'Collapsing Banks' and Deflation

Off Topic Politics and World Issues
21

The Daily Crux: OK, so you don’t think the Fed will go that far. But what if the government got involved and tried to inflate its way out by issuing massive amounts of Treasury bonds to the Fed? Wouldn’t that create inflation?

Robert Prechter: If the government tried to do that, bond holders would get spooked, and interest rates would go up and stay ahead of the printing. At the same time, other credit prices - municipal, corporate and consumer - would implode. When the supply of credit is far bigger than the supply of money - and it is by a huge margin - the value of old credit can contract faster than new bonds can be printed. The net result would still be deflation.

But this is not the most likely scenario. Have you noticed that even the Fed chairman has been telling Congress it needs to stop spending and borrowing? The Fed doesn’t want this to happen any more than other creditors do.

If the Treasury’s interest rates do soar, it will not likely be due to inflation fears but to fear of government default. If the government is forced to pay higher and higher rates, it will become a black hole for money. Spiraling Treasury rates would suck money from other sources, causing banks, municipalities and companies to fail, ruining all of their debts, which would be deflationary.

Crux: Will hyperinflation ever happen in the U.S.?

Prechter: It certainly might. But it could only happen after the bond market implodes, not before. Then, if politicians get hold of a press, they might decide to print. But this is political conjecture, not monetary analysis. First we have to cross the deflationary valley, and this could take longer than almost anyone thinks.

Crux: So what you’re saying is that inflation is possible, but that it can’t happen until deflation has run its course. What would you be looking for to indicate that deflation was over and that inflation was beginning to become a danger?

Prechter: A banking crisis, in which thousands of banks shut their doors. Thirty-three percent unemployment. A ruined private and municipal bond market. And a panic in government bonds. If all those things happened, then you would have to be on the lookout for legislation allowing the government to take over the printing of money or to force the Fed to monetize new federal debt at a rapid rate. I think we will have to see all these things before hyperinflation will become possible. If all of this happens, trade all your greenbacks immediately for gold and raw land.

Crux: Are there any scenarios that would change your mind, that would make you think you may be wrong and that inflation is becoming a threat?

Prechter: If the S&P index, real estate and the CRB commodity index all take out their price highs of 2006-2008, it would probably be enough to indicate runaway inflation. We keep a very close eye on all the key markets and will try to be ahead of any such development

22

TCD - nicely done

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[quote]IrishSteel wrote:
TCD - nicely done[/quote]

x2

24

‘Double Dip’? Or Did the ‘Great Recession’ Really Never End?
http://finance.yahoo.com/tech-ticker/double-dip-or-did-the-great-recession-really-never-end-yftt_510021.html

“…the real pain of late has been felt in the bond market. Excluding the panic levels of late 2008, the yield on the 10-year Treasury hit its lowest levels since 1962.”

"…Of course, the market is not always right but the bond market is signaling that policymakers like Ben Bernanke are right to be much more worried about deflation and economic slowdown vs. inflation and the economy overheating. "

"…this weekend’s G20 meeting shows that policymakers believe the time for fiscal austerity is at hand. From an economic point of view, the G20 confirms that the appeal of government spending (i.e. Keynesian economics) to combat the downturn is on the wane, replaced by a view that it’s better to take the pain now and cut spending (i.e. Austrian economics). "

“…Last week’s housing numbers were horrific, especially the steep drop in new home sales.”

Paul Krugman Throws In Towel, Says We’re Headed For Another Depression
http://finance.yahoo.com/tech-ticker/paul-krugman-throws-in-towel-says-we’re-headed-for-another-depression-509871.html?tickers=udn,uup,^dji,^gspc,^dji,gld

Krugman is giving into the idea of deflation. The more you fight it… the more it rears its ugly head.

25

Proud am I, young padawan.

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I would only add that Krugman’s analysis of the cause for deflation was way off base . . . just my opinion

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[quote]IrishSteel wrote:
I would only add that Krugman’s analysis of the cause for deflation was way off base . . . just my opinion[/quote]

Agreed.
Completely.
Ass backwards.

28

ok, please correct me if i’m wrong but assuming a fixed money supply would not an expanding economy be deflationary?

An increasing number of goods and services trading against a fixed number of dollars = deflation ?

Why do prices have to rise for there to be an increase in wealth? Why are we not taking into account the purchasing power of the dollar?

Thoughts ?

29

[quote]tmay11 wrote:
ok, please correct me if i’m wrong but assuming a fixed money supply would not an expanding economy be deflationary?

An increasing number of goods and services trading against a fixed number of dollars = deflation ?

Why do prices have to rise for there to be an increase in wealth? Why are we not taking into account the purchasing power of the dollar?

Thoughts ?[/quote]

Yes. How do you assume a fixed money supply? What would be the components of this fixed money supply? It sounds as if you are referring to cash and coin, which only makes up approximately 3% of our money supply and is actually the monetary base (MB).
You have M1, M2, M3 (the most useful, but the Fed Reserve quit using as it is too revealing of their machinations.

Bottom line, what you described cannot exist. An expanding economy increases money supply because of all the credit that is created in the process.

You cannot have a fixed money supply with fractional reserve banking.

Mush to elaborate on, but no time now. Read the Failed States thread and a little of my Market Predictions, ignorance on display.

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US Still Spending Despite Global Shift Toward Austerity

"The US stock market managed a weak rally yesterday. The Dow rose 56 points. Gold fell, closing the day below $1,200.

This morning, stocks are generally going down again all over the world.

Why does everything seem to be going down? Because it’s a Great Correction, what else?

The correction is doing its work. The feds tried to stop it with trillions in loans, guarantees, and stimulus spending. They failed. Over the last three weeks we have had confirmation after confirmation - the recovery ain’t happening. Unemployment is getting worse. Prices are falling - even the price of labor. The banks don’t lend and the people don’t spend.

Cities and states are running out of money. Households are going broke. And the stock market looks like it wants to roll over and die.

Is that a great correction, or what?

Dear readers who are hoping to get rich on gold are probably going to have to wait. We’ve entered a period of gentle de-leveraging - at least that’s what it looks like today. Until we get some real crises - or better yet, some real inflation - gold will probably drift downwards.

Not that we’re worried about it. Ben Bernanke has added more to the natio’s monetary base than all the Fed chairmen that came before him combined - including Alan Greenspan. But don’t have any illusions. It can take a long time for this monetary inflation to turn into the kind of inflation that sends the price of gold soaring. And a lot can happen along the way.

But for now, businesses are reducing their debt. Households are reducing their debt. Even government is cutting back."

We have followed Japan into the liquidity trap.

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Krugman is just a quatitative easing shill. He wants to threaten us all with the deflationary death spiral to push that agenda.

An important point Rick Santelli made in a recent interview is that most people are confusing Deleveraging with Deflation - deleveraging involving credit in its various manifestations. I was one of those people, not gonna lie.

But yeah, I think inflation is way off and will be a hyperinflationary currency event due to debt issues. Till then we have declining velocity of money and massive deleveraging with the government trying to counterbalance it with all kinds of unintended consequences.

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[quote]JEATON wrote:

[quote]IrishSteel wrote:
I would only add that Krugman’s analysis of the cause for deflation was way off base . . . just my opinion[/quote]

Agreed.
Completely.
Ass backwards.[/quote]

Can you give more detail?

From reading his book, it would seem deflation, the bad crippling kind seen during Depressions, is caused by enacted tight monetary and fiscal policies during a recession as well as having a overvalued currency. He supports this claim with the real world- ie The Tequila crises, Japan 1990- now, and Asia in the 90s, and the Great Depression.

It made sense to me. That is, Keynesian economics. Short term - stimulate, inject money, lower interest rates, dont let the economy wilter away, fight deflation (unemployment). Then once the economy is recovered, raise rates to prevent inflation. He also gave support to this - Sweden, Japan 1998, U.S 1987 after stock market crash, etc.

However, I don’t think he takes into account all the variables that influences human behavior - and thus makes us largely unpredictable and turns each crises into a wholly unique situation.

“If the private sector won’t spend enough to maintain full employment, the public sector must take up the slack.”

Too bad this didn’t work. :frowning:

33

[quote]milktruck wrote:
Krugman is just a quatitative easing shill. He wants to threaten us all with the deflationary death spiral to push that agenda.
[/quote]

So the threat is imaginary?

Deleverage = Paying off debt.
Deflation = A general decline in prices, often caused by a reduction in the supply of money or credit

If your deleveraging, your saving money - paying off debt - and not taking credit. Thus, credit is no longer expanding and velocity of money has slowed. This creates deflation.

So deleverage can be seen as the cause and deflation as the symptom?

34

Brilliant statement at 3:10

From Krugman:

“One thing that can get an economy out of a liquidity trap is expected inflation , which discourages people from hoarding money.”

“Once inflation has become deeply embedded in the public’s expectations, it can be wrung out of the system only though a period of high unemployment.”

35

Just the fact that no one can really determine what will happen: deflation,inflation, neither, is one reason I am shifting away from paper money. Sure, I’ll always have some money in dollars, that’s unavoidable. Fiat money is just not stable.

Who can make a long term plan in this environment? EVERYTHING (taxes, value of the dollar, regulations on business) is just too fluid. This is a big reason our economy sucks. No one can plan. Amazing that Barry can’t think of that…or maybe he can…

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the threat isnt imaginary, but more quantitative easing is now deflationary (until it triggers hyperinflation). One more dollar of debt creates less than a dollar of GDP right now because of the drag of the debt created. I will post a link when I have a second.

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[quote]milktruck wrote:
the threat isnt imaginary, but more quantitative easing is now deflationary (until it triggers hyperinflation). One more dollar of debt creates less than a dollar of GDP right now because of the drag of the debt created. I will post a link when I have a second. [/quote]

Yep. I have that chart, from the government itself, showing how debt now actually decreases the GDP. They (our ‘leaders’, LOL at that) are out of options, except for getting out of the way.

"And now, John Galt will speak to the people of the world!.. ‘Get the hell out of my way!!’

(Atlas Shrugged)

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How to Cure an Economic Depression

"…We’ve been talking about the Japan trap for years. Economist Richard Koo calls it a “balance sheet recession” He’s right about that. The private sector destroys excess capacity and excess debt. When it’s over, the private sector balance sheet looks a lot better.

Of course, it could happen faster. In Japan, it may still be going on. Why? Because the Japanese feds worked so hard to stop it. Monetary stimulus. Fiscal stimulus. Quantitative easing. They tried everything. And kept at it for nearly 20 years.

But what they were really doing was preventing the one fix that really fixes. It is as if they were letting the air out of the market economy’s tires…and then were amazed that it didn’t roll.

You know what cures a depression, dear reader? We’ll tell you. A depression.

A depression destroys excessive debt. Businesses with too much debt go broke. Bonds that can’t be paid go into default. Households that have spent more than they could afford go broke.

Problem solved. Debt disappears.

Then, the economy can grow again."

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[quote]Headhunter wrote:
Just the fact that no one can really determine what will happen: deflation,inflation, neither, is one reason I am shifting away from paper money. Sure, I’ll always have some money in dollars, that’s unavoidable. Fiat money is just not stable.

Who can make a long term plan in this environment? EVERYTHING (taxes, value of the dollar, regulations on business) is just too fluid. This is a big reason our economy sucks. No one can plan. Amazing that Barry can’t think of that…or maybe he can…[/quote]

I have such little savings, that a minimum decent investment in silver would equal 60% of it. Haha. So, as of right now, I just have dollars and SIN (Shit I Need).

Im banking on deflation - hyperinflation scenario. If that pans out, I can buy silver before the true collapse begins. If we enter hyperinflation mode from the get-go, I won’t be as screwed because I will have the shit that I need. :slight_smile:

40

The problem is, is that the second we see deflation we will inflate again just this time with a much bigger dose.

Banks are loaning the money they are getting from the FED for .5% interest rates then loaning it to the government for 4%. This is what deflationists are looking over this fact right here disproves the deflationists idea that banks will hold the money.

Lets take a look at what deflation would do, look at all the social programs that would have to be eliminated/cut. Do you really think Obama is going to do that? No he will have Bernanke start quanitative easing, and through the big banks the money will be released. We have already seen them do this on a small scale. Cash for clunkers is a great example. So is the housing rebate. While we may look at them and say they where failures they will say the problem is it wasn’t big enough.

Make no mistake when the markets collapse we will fire up the printing press and the money will flow directly into the economy. Wether it be through “tax credits”, special deals, or banks loaning the money they are getting from the FED for .5% interest rates then loaning it to the government for 4%(which will be given by either the American people or the Fed).