Friday, August 6, 2010

Deflation Watch: Deflation is Right

Good big-picture perspective from Sovereign Speculator:

Also remember that the public sector has gotten itself into huge trouble, which is just starting to take effect with austerity measures in Europe and pending bankruptcies in US municipalities. US states are also broke and will have to finally deal with their union problems. Shrinking government worker salaries, if not payrolls, will put further pressure on demand for goods and leave banks with more bad loans. None of this is inflationary. Remember, in the ’70s private debt was low and growing, and companies were increasing their revenues and profits so that by ‘82 Dow 1000 was a bargain. Now we’re in a generational de-leveraging, frugality-restoring mode, Kondratieff winter for lack of a better term.

The last couple of years should give deflationists confidence that we’re able to correctly assess the situation. Where is that dollar crash? What about $200 oil? What, in 2010 China still owns trillions in treasuries? Bernanke has tripled the US base money supply but a dozen eggs is still $1.50 and the long bond yields 4%? Obama spent how much, and unemployment is 17% ?
One of the biggest stories of the year is deflationists and Treasury bulls being proven right.


Unknown said...

It be a bit early for you deflationistas to be declaring victory; you may well be correct in the short term, but perhaps not in the long term, it remains to be seen. Here's something to consider that seems to be surprisingly absent from almost all commentary on the subject: In deflation, as prices decline due to the deflation, wages necessarily fall (to zero for those workers unwilling to face reality), government revenues fall as well, yet the nominal denominations of the government debt remains the same, even as the value of each currency unit increases, making already mathematically unsupportable debt levels absolutely unpayable and the subject government goes poof! So, do you really think Chopper Ben will let the US government go under due collapse by debt, or would he rather dump unlimited money into the economy even though that will destroy the citizens wealth a la Weimar? I think I know where his priorities lie and I'll keep my inflation hedges, thank you.

Anonymous said...

Ah... where is Ben going to dump the money?

Please don't say the banks.

Attitude_Check said...

In the short-term absolutely right, but in the longer term, this will continue to be true, while the $ FX strength collapses, so we will have domestic inflation AND $200/barrel oil. When the reality sinks in that the US government can't pay it's debts without direct monetization - no one will want to hold $'s. That reality is coming. Of course if the US FED decides to "solve" this by direct monetization, then we will REALLY have FX weakness, and only SLIGHTLY less deflation, since the shadow banking system credit expansion is multiple of the entire annual US GDP.

So Deflation now, and continued domestic deflation with FX weakness spiking import prices.

CP said...


Raymonde said...

As an amateur financial analyst, (I do after all, have to look after my own financial well being and have decided the closer my small nest egg is to cash the better off I am right now)I am attempting to follow the discussions here and at

I am often confused and that's because I am struggling with an Econ 101 level understanding and because I don't do my homework.

But on the money issue that Chopper Ben has worked so assiduously to confuse us on-remember he was a raving fan of collateralized debt obligations that to my mind are what drove that last public appearance of the Emperor's naked bum-on this issue I have done my homework and slaved under the light of the proverbial midnight candles. Well, hot computer.
Those CDO's- Credit Default Swaps and Hedge Hogs,
Hedge funds

I give up.


Take a deep breath and release.

Benny boy $hipped 3.7 Trillion to the banks. I would have thought that would have made our greenbacks worthless, but as I say, even as I am writing this I could see why that is not true-the banks hoarded making them scarce-all of those dollars-or were they really not dollars but just some government script?

Don't know.

Finally, is there a good book somewhere that would explain all this -our money system, banking, national finance (not corporate finance)-in succinct terms. I suspect that non mathematical discussion are also perhaps limited.

Physics cannot really be understood without relying on some analysis that moves beyond High School algebra; would not the same be true of these topics.

Finally, I wonder if some of this is really a matter of identifying illusions based on perspective. Is the shimmering apparition in the distance a pond or merely an illusion created by heat waves?

Anonymous said...

Deflation deflation deflation deflation deflation

CP said...*0/technical-chart?plot=BAR&volume=contract&data=MN&density=X&pricesOn=1&asPctChange=0&logscale=0&sym=SI*0&grid=1&height=500&studyheight=100

CP said...

silver WANTS to take out that late 2015 low:*0/technical-chart?plot=BAR&volume=contract&data=MN&density=X&pricesOn=1&asPctChange=0&logscale=0&sym=SI*0&grid=1&height=500&studyheight=100