AuthorTopic: More On Deflation  (Read 82 times)

Offline Eddie

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More On Deflation
« on: April 14, 2020, 08:56:17 AM »
Because the credit markets tried to collapse (for many reasons, but the trigger being coronavirus)........the Fed has had to do another, bigger bailout. The helicopter money to poor people is a very small part of that. A cover-up for a much, much larger bank bailout.

Prices will no doubt go up for staple items that are in short supply (like meat and TP)...but the real wealth destroyer facing savers is a drop in asset prices......for most normal people it will mean that the dollar value of their investments and real estate goes down.

The idea that this is a good thing for anybody.....or that we should celebrate because the Fed's chickens are coming home to roost (they are) is pretty short-sided. Poor people are about to get even poorer, and middle-class people are too. Over 60% of Americans have a home and a mortgage. If that's you, this is a time of financial disaster. If you have any kind of retirement plan, that''s you, too.

As we saw after 2008, price inflation on the things we use and need can still go up. Food can go up. Rent can go up. Maybe fuel prices will stay low.

Jobs have just disappeared like a puff of smoke...especially low-skill labor jobs...and without a robust economy to support the service sector, they won't come back.

People are predicting hyperinflation again. Nothing is less likely. I'm going to post this little article by Mike Shedlock...because he gets credit and deflation. This is what he said in 2008-2009, and he was absolutely correct. Others, including RE and Automatic  Earth and some others also get deflation. But Mish understands that the problem is that debtors cannot service their debt right now.....this is the MAIN thing that makes asset bubbles pop.

The best place to have savings is still in tangible assets of all kinds...but held with little or no leverage. But it would be fine to be holding cash dollars too. Gold and silver are fine to own, but the idea that they are going to the moon is far-fetched at this point.

 Leveraged investors are going to get smashed, For those who are not as leveraged, this is just another dip to ride out. I don't think it's quite the end game some collapseniks would like for it to be,  It is NOT a time to buy gold with a bunch of leverage, thinking you're going to make a killing. Mish explains why.


an hour ago

CoinDesk asked me to share my opinions on the chance of hyperinflation. My thoughts are below.
From CoinDesk

Hi Mish,

I am working on an article for CoinDesk about recent fiscal and monetary splurge by governments and central banks across the globe and the impact on gold and bitcoin. As I see, a majority of analysts and economists are calling for hyperinflation and rally in gold.

Could you please share your take?



Matter of Definitions

Before there can be a rational debate on anything, people must agree on definitions.

I believe most people would accept this definition: Hyperinflation is the complete collapse in currency against every other asset.

Pick a currency, say the US dollar. To bet on hyperinflation and be correct, the dollar would have to go nearly worthless vs the Euro, the Pound, the Yen.

Alternatively, 50% in a single month would quality. Professor Hanke defines Hyperinflation as a 50% Currency Collapser in a Month.

Q: How likely is that?

A: Close to zero.

Replay Discussion

Curiously, this is a replay of my 2010 article Williams Calls for “Great Hyperinflationary Great Depression”.

Williams is John Williams of Shadowstats. He was not alone. Here is a snip changing the name Williams to "Hyperinflationsists" in the first word of these four points.

Hyperinflationists focus on money supply, ignoring credit although credit is far more important.
Hyperinflationists ignore numerous global interconnections. Calling for hyperinflation in the US alone ignores happenings in Europe, Japan, and China. I remain amazed at how US-centric hyperinflationists in general are.
Hyperinflationists ignore US gold holdings, the largest in the world.
Hyperinflationists ignore the massive influence of consumer attitudes and bank attitudes towards lending.
To expect the US dollar to go to zero vs the Euro, Yen, Food, gold, Yuan, etc., was then and is now pure silliness.

Hyperinflation, a Political Event

Hyperinflation is primarily a political event, not a monetary one. More accurately, the first leads to the second.


Weimar Germany: Demands for war reparations following WWI set in motion finances that could not be repaid. Germany turned to the printing press.
Zimbabwe: Prime Minister, Robert Mugabe confiscated land to give to the people. The result was white flight and capital flight. The country collapsed as did the currency.
Venezuela: To fight poverty, presidents Hugo Chávez and Nicolás Maduro took over the oil industry and gave cheap gasoline to the people. In US dollar terms, gasoline is now a penny a liter. But you will not find any at that price.
Wake me up when AOC is president and Congress authorizes free money to the tune of $50,000 per year per person, indexed to prices.

US hyperinflation would take an event like that. And it would be a political event leading the way.

Such a setup is not impossible but it is not likely.

Trillions of dollars in Repos as available credit does does not suffice. Moreover, central banks are beholden to the subsidiary banks. Hyperinflation would destroy banks and that is the last thing the Fed wants.

So toss hyperinflation away as nonsensical until a genuine political event sufficient in nature is on the horizon.

What About High Inflation?

Once again definitions come into play and this time the definitions are more important because there are so many of them.

Inflation is an increase in prices or a decrease in the purchasing power of a currency
Inflation is an increase in money supply
Inflation is an increase in money supply and credit
Inflation is an increase in money supply and credit with credit marked to market.
Everyone is correct under their own prefered definition.

But what is really important in the fiat-credit world we have been in since Nixon closed the gold window?

It's Credit that Matters

Definition number 4 is mine. Yet despite my use of that definition I get mocked all the time. "Look at that fool, the prices I pay all the time keep rising," I hear all the time.

Yep prices generally rise. I never said otherwise. And they rise more in places where government touches the most: Education, medical care, and housing are three prime examples.

Housing is not even in the CPI. It should be. And if it was the charlatans at the Fed would have seen that inflation was not below 2% but rather above 5%.

Home Prices vs Wages and CPI

This is the most important part..this chart. It is where that blue line ends up that matters. If it bounces like 2010 we have a recession. If it keep falling we have a depression.

That chart is proof of massive asset inflation as well as price inflation. Take your pick, but the Fed does not see it.

For the third time in 20 years, loose monetary policy at the Fed blew huge bubbles.

Very Deflationary Outcome Has Begun: Blame the Fed

On March 5, I wrote a Very Deflationary Outcome Has Begun: Blame the Fed

Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.

Those expecting a massive surge of inflation missed the boat. We HAD a massive surge of inflation primarily reflected in asset prices, not consumer prices.

Bubbles are inherently deflationary.

It’s asset asset bubble deflation that is damaging, not routine price deflation.

When asset bubbles burst, debt deflation results. People cannot pay back the loans they have taken out. Bank loans go sour and banks are reluctant to lend. Credit dries up.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Definition Review

Inflation is best thought of as an increase in money supply and credit with credit marked to market.
Deflation is best thought of as a decrease in money supply and credit with credit marked to market.
My definitions reflect what is important. And debt deflation following asset bubble bursts is at the top of the list.

In 2009, we had deflation as measured by my definition and even by the CPI. Deflation was massive if one properly included housing prices.

In 2007 I made this call: "Expect the US to go in and out of deflation a number of times."

People thought I was nuts, and they still do because they do not read what I am saying, nor do most remotely understand the role of credit and debt deflation in these bubbles. Instead they hear the word "deflation" and react to the word.

In 2009, regulators suspended mark-to-mark accounting effectively masking a portion of my definition.

Mark-to-mark accounting is still best thought of as mark-to-fantasy. Mark-to-market rules never returned.

Junk Bond Bubble in Pictures

On July 17, 2019 I wrote Junk Bond Bubble in Pictures: Deflation Up Next

What happened?

There Are No Temporary Measures, Just Permanent Lies

On April 9 I noted There Are No Temporary Measures, Just Permanent Lies

Under guise of virus support, the Fed Will Buy Junk Bonds, Lend to States to the tune of an additional $2.3 trillion in additional aid.

Here we go again. Another deflationary credit bust is upon us. Lower prices will follow, especially in assets.

The Fed brought this upon themselves, fighting inflation when they should have been worried about asset bubbles.

What About Gold?

Gold does well in deflation and in times of severe credit stress but not when there is slowly falling price inflation.

Gold fell from $850 to $250 between 1980 and 2000 with inflation every step of the way.

If you believe as I do, that central banks are struggling with credit stress on multiple fronts, then buy gold. But don't expect high price inflation anytime soon. And write off as totally nonsensical any notions of hyperinflation.

Here's the deal:

Gold's recent action is not a hyperinflation signal or even a high inflation signal. Rather, gold is signaling debt deflation and the Fed's panic to contain it.

Mike "Mish" Shedlock

« Last Edit: April 14, 2020, 11:57:38 AM by Eddie »
What makes the desert beautiful is that somewhere it hides a well.


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