Financial topics

[Trevor]

I still think there's going to be some deflation, though perhaps less dramatic than what we saw in the depression. In one of the years, 1932 I believe, the currency deflated about 17 percent.

[vincecate]

Vince and Higgie - I have a question.

You recently suggested that there might be deflation followed by
hyperinflation. What's the reasoning behind that suggestion? In
particular, once deflation was in force, why would there be
hyperinflation?

John

Historically deflation before hyperinflation happens surprisingly often. The deflationary forces are things like paying off debt and slower velocity of money. There is really a finite amount of paying off going on and a limit to how slow money is going to go. There is no limit to how much money the central bank can print. So when they leap into action to fight deflation they will kill deflation, always. Then when people see an inflation rate higher than their mortgage rate they don't hurry to pay down their debt. When they see prices going up they don't hold off purchases for things they will need any longer. The deflationary forces evaporate. The pendulum swings the other way.

As Bernanke says. "under a paper-money system, a determined government can always generate higher spending and hence positive inflation." Read his logic and think about it. He is very right.

So there is something that can prevent deflation, printing enough money, but when things go the other way they can go into a positive feedback loop that breaks the currency. Deflation before hyperinflation is like the tide going out before a tsunami. Often the really big swings into inflation start from really slow money velocity and lots of money printing. Once things get to where inflation is destroying the value of bonds and people are fleeing bonds, then they can't stop printing and things get out of control.

To swing the pendulum so far to the inflation side that you are past the point of no return history often starts the pendulum on the deflation side. Really.

-- Vince

Bernanke:

"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

"What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

Read to really understand the 5 sections starting here:

http://pair.offshore.ai/38yearcycle/#hyperinflation

[jdcpapa]

always.

Good morning Vince,

I never say never. But, I never say always!

Respectfully,

[jdcpapa]

Some people fantasize that the girl of their dreams will magically
appear and come to save them. Other people fantasize that they'll win
the lottery, and that will save them. Still others fantasize that
hyperinflation will save them. There oughta be a name for those
fantasies.

Orgasm?

[vincecate]

always.

Good morning Vince,

I never say never. But, I never say always!

Respectfully,

The one thing I am sure of in this uncertain world is that governments can devalue paper money.

If I had a magic machine that could make gold bars in unlimited quantity you can bet the value of gold would go down. This seems beyond question. You think I would just buy a couple yachts, lets call them "QE1" and "QE2", and then stop there? You don't understand human nature.

[jdcpapa]

Vince and Higgie - I have a question.

You recently suggested that there might be deflation followed by
hyperinflation. What's the reasoning behind that suggestion? In
particular, once deflation was in force, why would there be
hyperinflation?

John

Good morning John,

Nothing like waking up to a rhetorical question and a cup of joe! Here is an interesting article in support of the hyperinflationary camp. The only problem is that it was written before "the Bernanke" cranked up the printing presses:


http://www.marketskeptics.com/2008/12/h ... ation.html

Regards,

[John]

> Historically deflation before hyperinflation happens surprisingly
> often.

> There could (probably will in my opinion) be too much disorder in
> the system to either have a true deflation ...

How would this work? Do you have any example of a country during the
period 1929-45 that serves as a model?

John

[Trevor]

I think it can also depend on what qualifies as hyperinflation. There's no universal definition.

[jdcpapa]

You don't understand human nature.

Vince,

Talk about the kettle calling the pot black. You are "all in". I hope and pray it works for you.

John

[vincecate]

How would this work? Do you have any example of a country during the
period 1929-45 that serves as a model?

When the US dollar went from 1 oz of gold to about 1/2 oz of gold in 1933 the price of international commodities about doubled. This is called a "hyperinflationary event" by some economists. It is not the usual hyperinflation that goes on to the destruction of the currency but prices did go up by more than 5% per month (my favorite definition of hyperinflation, but as another poster said, there is no universal agreement on the definition). And there was deflation before that.

But I would not say this is the model or typical case. The US did not have debt over 80% of GNP and deficit over 40% of spending, so it did not result in the destruction of the currency.