AuthorTopic: Hyperinflation or Deflation?  (Read 123523 times)

Offline ross

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Hyperinflation or Deflation?
« on: March 31, 2012, 12:36:27 PM »
The difference between hyper inflation and deflationary collapse matters to people with cash money and assets. Much depends on the type of assets you have.

Ben Bernanke is waving at the market like a drunk with his dick hanging out that he wants inflation. Serious inflation. And that explains a lot of the asset choice behaviors over the last 18 months. Inflation expectation are extreme. Wouldn't you know, we just had our first shock in the form of a 25% increase for gas inside of three months.

The only outcome is deflation no matter what. The dynamics of the credit leverage we employ in the economy (30 year home financing, 5 year zero interest financing for automobiles) and the (loss of) velocity of money ensure a deflationary event is in our future. We are facing a global breakdown in trade because of failures in the credit/currency markets and availability of low cost energy. The reasons people freaked and made a lot of people full-time TSHTF about "TSHTF" in 2008 is because it looked like the global markets were imploding and going into a terminal collapse.

Even after hyper inflation comes a deflation where money is practically worthless. Meaningful trade is done in barter or "backed scrip."

We are stuffing the toilet bowl to avoid the flush. It won't work. But it can go on a lot longer.
« Last Edit: March 31, 2012, 12:42:19 PM by ross »

Offline RE

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Re: Hyperinflation or Deflation?
« Reply #1 on: March 31, 2012, 01:43:48 PM »
The difference between hyper inflation and deflationary collapse matters to people with cash money and assets. Much depends on the type of assets you have.

True, it DOES matter to people who actually HAVE some "savings" or "assets" which way the Ball Bounces here.  However, since about 80% of the population really HAS no assets or significant savings, how it collapses doesn't really matter to them very much.

The folks who worry about Inflation/Deflation are those who have their Matresses stuffed with FRNs and their Basement Safes stuffed with Gold Eagles to hedge it.  They figure if the FRNs go worthless, the Gold will increase in value.  They may also buy Land to hedge further, figuring they can grow their own Tomatoes in their raised bed Permaculture Garden either way.  Of course, buying Land sticks them with a Tax Liability and since most of the folks with a pile of money would have no clue whatsoever as to what to DO with a piece of land, exactly how good an investment that is for them is an open question.

Let us look at the example of the Average sorta Successful Boomer here who has a Paid Off McMansion, an IRA of say $500K distributed out in Mutual Funds and Stocks and $50K in his FDIC Insured Savings and Checking Accounts.  How does Inflation/Deflation affect him?

If it is Deflation ruling the day, his $500K portfolio drops in value tremendously.  Stocks drop in value, Bonds are Defaulted on.  His $50K in Cash though has more value, assuming of course he gets it out of the Bank before it shuts the doors.

If it is Inflation ruling the day, his Cash money goes about worthless, but in theory he can sell his Stocks and Bonds for higher prices since this is where the newly printed money will flow in some fashion.  However, after converting the sale to Cash at the higher prices, it of course still buys less of what he needs, so he burns through the savings there faster.

In neither case can the Boomer Saver really protect himself, the assets he has may stay steady or even rise in nominal value in an inflationary scenario, but upon liquidating them he still cannot buy what he needs because the commodities have also inflated up in nominal cost.  In a deflation, his assets are worth less (or in some cases WORTHLESS), so he also is fucked this way.

Definitely Helicopter Ben is trying to Inflate the economy, evidenced by the current $4.35/gal I am paying for Gas now here on the Last Great Frontier.  That is even a higher price than I payed right before the crash in 2008-9, I think it maxed then at $4.25/gal.  I cannot see how this price can be supported very long.  Add to that the around $10/gal price I have read is common in Eurotrashland, WTF can BUY this product anymore in these economies?  Either the price collapses or we will quickly be going Lights Out and No Driving here and in Europe.  The end consumer isn't being issued money to buy at these prices.  I expect a Price Collapse, because I do not think the Illuminati are quite ready to send the entire industrialized world into Lights Out quite yet.  Parts of it like Greece and Spain yes, but not the whole Ball of Wax.

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Offline Surly1

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Re: Hyperinflation or Deflation?
« Reply #2 on: April 01, 2012, 06:27:48 AM »
This is great!!
"It is difficult to write a paradiso when all the superficial indications are that you ought to write an apocalypse." -Ezra Pound

Offline ross

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Re: Hyperinflation or Deflation?
« Reply #3 on: April 01, 2012, 07:20:05 AM »
It does matter. If you don't have money, it matters even more whether it is deflation or hyperinflation. Hyperinflation is an equalizer in some sense. It destroys everyone's wealth equally past a certain threshold of intolerance. People always win out in these scenarios but they're usually connected government insiders and the owners of physical capital who maintain physical possession through and after the hyperinflation occurs. Who in Zimbabwe was still rich after hyperinflation? The military and Robert Mugabe + entourage (100,000 lucky Ins?)

It has an intimate effect on the pace of collapse and the overall social compact. Hyperinflation would truly galvanize the 99% against the 1%. Engulfed in such a horror, no one can really protect papers assets at all. Consider the one difference going for this monetary collapse is that the majority of the denominations are digital ledgers.

It is the limited number of people capable of operating complex mechanical capital that come out holding the wealth in a hyperinflation. Crime would spike during hyperinflation but social order would not collapse. Government could maintain order up to the point of open insurrection. Rioting and "armed looting" would be expected. Basically, you'd see people get tribal in a hurry.

A lot of businesses would end up closing out of the sheer terror of operating in the HI price environment. Mafias fill the void in vulnerable areas, so pretty much every urban periphery becomes a slum area. Rents can't be paid, real estate owners must collect from their tenants somehow especially b/c physical ejection is risky. The devolution of social order in the exurbs and "working class" suburbs does not signal the end of anything. A new currency can be strung up fast, and it can be fiat. Electronics also allows rapid deployment of a new currency regime. What choice do you have but to use your ATM card for the new red money. Since all the green money got canceled out...

Hyperinflation is not the dirt nap you're looking for. It is likely the contraction in "Growth" aka consumerism and hedonism is restricted to a smaller group, the ones who float their reconstituted corporations on the new red money stock exchange. Who is rich in the Russian Federation? Putin may end up as the richest man in the world!

Deflation, on the other hand, truly threatens the entire economic paradigm and once deflation begins you scale on the Collapse spectrum. Deflation would essentially mean the abandonment of money and the tyranny of money. Greece is being forced to endure a deflation instead of being allowed to have a hyperinflation, which is what would ultimately occur if they default and then re-denominate all the old debt into the new currency.

In Greece, businesses have been shutting down because people stopped patronizing them and the taxes. People went into survival mode. Hoarding cash and supplies. Making arrangements to flee or go underground. Setting up barter exchanges and going back to the land. Also, as money left the economy, things got relatively more expensive. Gas may be $10 in Athens but what's a Greek Taxi make per day? The notional feel for him could be what we'd feel like at $20

Deflation is like unplugging a bath tub full of water. It sucks cash out of the economy to settle obligations at once! The extension of credit ceases because projects and enterprises must stand on their own rather than their ability to favorably finance. Time value of money becomes the primal factor. Extension of cash flow credit, for time-sensitive businesses can end suddenly.

Cash flow ends for everyone because people stop getting paid. And businesses close because their not getting customers because people stop getting paid. It is the virtuous circle of credit collapse. It does not happen overnight. It happens in several dislocations. Greece is significantly advanced right now over a few years at this point. Argentina came through a deflationary collapse that had the unfortunate side effect of severe inflation just not hyperinflation.

Crimes and mafias increase. People turn to the underground economy and barter. The underground and barter exchanges are predatory because the deflation is advantaging certain people. The government can begin to lose a grip on certain areas. If the supply of important civilian goods and services has run out, then the government has become a predatory adversary towards the people. Some areas and communities may agree to incorporate the new mafias. Mostly, people who have hoarded supplies specific to life support. Cooking oil. Rice. Condoms... And they trust can get more.

This is getting long. I only mean to illustrate that while that these paths might lead us to the same place, the journey is very different and cannot be approached the same way. Hyperinflation and collapse takes a very different approach than a grinding deflationary collapse.


Offline RE

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Re: Hyperinflation or Deflation?
« Reply #4 on: April 01, 2012, 09:26:08 AM »
Ding Ding Ding!  We have a Winner!

I'm going to put Ross' distinctions of the HI vs DF scenarios up as today's Feature in the Blog.  Later though.  I'm going back to bed for some more snooze time.

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Offline RE

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Re: Hyperinflation or Deflation?
« Reply #5 on: April 01, 2012, 02:05:28 PM »
This is getting long. I only mean to illustrate that while that these paths might lead us to the same place, the journey is very different and cannot be approached the same way. Hyperinflation and collapse takes a very different approach than a grinding deflationary collapse.

Yea, that one was getting up there in the word count!  You are learning well, Young Skywalker! LOL.



The intermediary outcomes do have differences, but one thing we are not considering here is how Dollar collapse differs from an Argentinian or Zimbabwe collapse.  In those cases, you can have a functioning Black Market utilizing still valid FOREX like Dollars or Euros.  What is going to function on the Black Market in a Dollar collapse?  Not enough people have gold or even silver coins to make that work, and besides, how would you value a Silver coin anyhow?

If Green Dollars aren't functioning, why would Red Dollars?  Just because they change the color they regain some value?

The issue of holding onto and maintaining control over "mechanical capital" is another concept I have difficulty with.  What exactly is Mechanical Capital worth without the Oil to run it?

Anyhow, here in the FSofA during the Great Depression Da Goobermint survived the deflation, but other Goobermints elsewhere did not (notably of course Germany).  However, the resource base was still pretty much intact in those days.  I don't see how Da Goobermint will survive either a Deflation or a Hyperinflation, and once you lose the FSofA as a cohesive Nation-State, it can't issue money of any kind that would be worth the paper it is printed on, Red, White or Blue Money doesn't matter.

Finally, I don't see how HI or DF matters to a person with no Assets and no money at all, aka about 50% of the population at least.  They have nothing to lose if the money HIs, they are ALREADY broke.  They aren't going to have access to the Black Market either way, even if a BM can form in some way running on Junk Silver Coins.  Regular commerce will grind to a halt of course either way.  The social contract will break down rapidly, at which point if you do have some functioning money, you'll likely be killed by somebody else who wants it.  What good is it to have a lot of money in such a situation?

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Offline Surly1

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Re: Hyperinflation or Deflation?
« Reply #6 on: April 01, 2012, 07:05:39 PM »

Quote from: RE
Finally, I don't see how HI or DF matters to a person with no Assets and no money at all, aka about 50% of the population at least.  They have nothing to lose if the money HIs, they are ALREADY broke.  They aren't going to have access to the Black Market either way, even if a BM can form in some way running on Junk Silver Coins.  Regular commerce will grind to a halt of course either way.  The social contract will break down rapidly, at which point if you do have some functioning money, you'll likely be killed by somebody else who wants it.  What good is it to have a lot of money in such a situation?


And now I think back to the storage unit paradigm and having trade goods amassed during this time when the (green) money worked. pallets of pint bottles of vodka, potatoes, and as Ross noted, cooking oil and rice. Who will have use for condoms?

Of course it won't take too long for the Mad Max spendthrift grasshoppers to follow the industrious preppers back to their storage unit and take what they want by force, unless you are Armed to the Teeth.

Excellent idea to make this a blog article.
« Last Edit: April 01, 2012, 08:07:21 PM by RE »
"It is difficult to write a paradiso when all the superficial indications are that you ought to write an apocalypse." -Ezra Pound

Offline RE

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Re: Hyperinflation or Deflation?
« Reply #7 on: April 01, 2012, 08:22:13 PM »

Quote from: RE
Finally, I don't see how HI or DF matters to a person with no Assets and no money at all, aka about 50% of the population at least.  They have nothing to lose if the money HIs, they are ALREADY broke.  They aren't going to have access to the Black Market either way, even if a BM can form in some way running on Junk Silver Coins.  Regular commerce will grind to a halt of course either way.  The social contract will break down rapidly, at which point if you do have some functioning money, you'll likely be killed by somebody else who wants it.  What good is it to have a lot of money in such a situation?


And now I think back to the storage unit paradigm and having trade goods amassed during this time when the (green) money worked. pallets of pint bottles of vodka, potatoes, and as Ross noted, cooking oil and rice. Who will have use for condoms?

Of course it won't take too long for the Mad Max spendthrift grasshoppers to follow the industrious preppers back to their storage unit and take what they want by force, unless you are Armed to the Teeth.

Excellent idea to make this a blog article.

Hyperinflation vs Deflation is always a popular Collapse topic :-)  Its kind of like bring up the Final Four in a Sports Bar, everybody is interested and everybody has an opinion.  Great conversation starter amongst Kollapsniks.

Far as the Storage Unit Paradigm goes, that one is finished once the shelves go empty at Walmart.  Time to go Full Primitive on the Final Bugout.  Empty the storage unit into the SUV with your Last Tankfull of Gas and head for them thar hills.



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Offline Golden Oxen

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Re: Hyperinflation or Deflation?
« Reply #8 on: April 13, 2012, 01:06:05 AM »
Is it conceivable we do not end up in the deflation or hyperinflation horror shows and just continue on our merry way of constant currency debasement? Perhaps just shift gears from say a 5% to a 9% inflation for a few decades. The rot we have now in purchasing power has been going on for quite a while and remains remarkably orderly.

Offline Jb

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Re: Hyperinflation or Deflation?
« Reply #9 on: April 13, 2012, 06:18:45 AM »
<a href="http://www.youtube.com/v/Z3sLhnDJJn0&fs=1" target="_blank" class="new_win">http://www.youtube.com/v/Z3sLhnDJJn0&fs=1</a>

Quote
Is it conceivable we do not end up in the deflation or hyperinflation horror shows and just continue on our merry way of constant currency debasement?

Sorry, Golden Oxen -  I just couldn't resist.  :)

IMO, the current debasement will continue for a while. Another year or two? But entropy is a bitch that can't be reckoned with. As the supplies of cheap, low sulphur, easy to get to oil disappear, the squeeze on our industrial economy makes a long term debasement without consequences 'inconceivable.' Something has to give and I'm assuming the first thing to go will be people's patience.

Jb

Offline Golden Oxen

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Re: Hyperinflation or Deflation?
« Reply #10 on: April 13, 2012, 06:58:22 AM »
I hear you Jb and had come to much the same conclusion until watching the natural gas price fall below 2.00 yesterday. Could this fracking, horizontal drilling craze really be the answer? Laughed at the original hype over it and told myself the save the environment crowd would never let them do it to the land or water if it was for real. I also looked at a long term chart of the price of a barrel of oil last night, 2.00 to over 100.00 in five decades and the cars and trucks are still on the roads and growing in number world wide. Haven't changed my mind on a dire outlook yet, but something does not add up here.
« Last Edit: April 13, 2012, 07:01:51 AM by Golden Oxen »

Offline Jb

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Re: Hyperinflation or Deflation?
« Reply #11 on: April 13, 2012, 08:16:59 AM »
Quote
the cars and trucks are still on the roads and growing in number world wide.

Golden Oxen,

I don't know if you frequent Steve's site over at http://www.economic-undertow.com/, but there has been an ongoing discussion of the declining rate of new car registrations in the EU:  http://www.economic-undertow.com/2012/04/06/the-abject-failure-of-economics/.

According to this article auto sales are up in the US thanks to access to credit and demand for more fuel efficient vehicles.  http://news.yahoo.com/chryslers-us-sales-hit-4-high-march-131431139.html

The US can postpone, but not escape from the economic misery taking a firm hold of the EU. At some point, the next wave of people reach the same breaking point we saw in 2008: Pay the morgage or car loan? Buy gas or buy food?

As for the price of natural gas, check out Chris Nelder's analysis if you haven't already done so: http://www.slate.com/articles/health_and_science/future_tense/2011/12/is_there_really_100_years_worth_of_natural_gas_beneath_the_united_states_.html

Jb

Offline Golden Oxen

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Re: Hyperinflation or Deflation?
« Reply #12 on: April 13, 2012, 08:40:28 AM »
Thanks for the links Jb. economic-undertow a new one to me but am very familiar with Chris Nelder's articles. It was his article recently " China in The Drivers Seat" that had started me questioning the whole energy picture. They are buying cars over there like it was the 1950's in the USA. Amazing how the price of oil and especially gasoline haven't altered the worldwide gasoline burning situation to a much larger degree.

Offline reanteben

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Re: Hyperinflation or Deflation?
« Reply #13 on: April 13, 2012, 09:40:12 AM »
Ox, if you are questioning the energy picture then prepare to have your mind blown by Steve From Virginia. :)

Offline JoeP

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Re: Hyperinflation or Deflation?
« Reply #14 on: April 13, 2012, 09:54:20 AM »
Ben,

Yeah, if you're talking about Steve's reply in the TAE "Downstream Demand Destruction for Oil" thread...that was a doozie.
just my straight shooting honest opinion