Financial topics

[vincecate]

You are predicting 30% deflation, like back then, when this has never happened with a pure fiat currency. Hyperinflation has happened over 100 times in pure fiat currencies. How can you be so certain you are right on this? How can you think hyperinflation is such a foolish prediction? It seems like history is on the hyperinflation side. Is this deflation a "generational dynamics prediction" or is this just your own prediction?

There was 30% inflation from 1977-80 during the 1970s, so 30%
deflation in three years is not exactly far fetched.

Nobody thinks that 30% inflation in a fiat currency is far fetched. Happens all the time. Argentina is doing about that each year right now. But you can not find any example of a pure fiat currency doing 30% deflation (partially backed can get deflation). So predicting something that has never happened is a bit far fetched.

No, it's not just guesswork. The 30% deflation prediction is obtained by applying the Law of Mean Reversion to the CPI curve. Inflation is mostly an Awakening/Unraveling era phenomenon. Deflation is mostly a Crisis era phenomenon, after a big bubble has burst.

Under gold or silver money the periods of inflation were balanced by periods of deflation for net price stability over even 100 years. Under fiat currency they have almost eliminated deflation. Fiat currencies seem to be mostly in the 2% to 10% inflation, but deflation is very rare. So over long periods of time prices show a clear upward trend. Using Mean Reversion on something that has a clear upward trend does not make sense.

My parents bought a nice house for something like $25,000 a long time ago. Do you expect Mean Reversion to house prices like that? Would be silly, right? The reason is there is far far more money about today, as they have printed huge amounts since my parents bought that house.

You talk about hyperinflation happening over 100 times, and yet you only give feeble excuses and can't give even one example out of those hundreds that occurred during the Great Depression. You would think that at least one of those 100 examples would have happened, if only by accident. The fact that it didn't should tell you something.

Before the 1930s the world was largely using money backed by gold and silver. During the 30s they dropped the backing. It usually takes awhile before conditions get to where hyperinflation happens. So it should not really be that surprising that there are not that many cases in the 30s.

China is an interesting one. FDR decided to buy a bunch of silver around 1933. This drove up the value of silver relative to gold, which caused deflation in China which had silver backed money. Huge drop in prices and big troubles. China moved to central banking and fiat money in 1935 and then into hyperinflation.

http://www.thefreemanonline.org/columns ... inflation/

"the whole-sale price index of Shanghai during this period, with May 1937 equaling 1. By the end of 1941 the Shanghai whole-sale price index stood at 15.98." It got worse after that, but this is over 5% per month.

http://www.fee.org/pdf/the-freeman/ftp1204.pdf

Another case is the Phillippines (1939-1945)

http://awakeningtoliberty.blogspot.com/ ... ation.html

Now both of these are partly due to war with Japan. But we are expecting war, right? So that fits with the hyperinflation theory.

You always talk about the Fed printing money if China stops buying Treasuries. If China stops buying Treasuries, it would be considered an act of war.

It always strikes me as odd that people will say that China has too keep buying when they are not buying. At one point China was down for the most recent year, and people would still say that China has to buy. Today they are down for the most recent 4 months. How can you say they have to buy when they are not buying?

If you look at China in the info below the only time they went up much was when it goes from "old series" to "new series" where there was a change in how they made up the data. Other than that this last year does not look like much buying at all.

http://www.treasury.gov/resource-center ... ts/mfh.txt

In fact, a threatened default would most likely only occur during hostilities. Why would the Fed "print money" to pay people we're at war with? The U.S. could simply cancel China's debt, cutting our national debt in half.

The US froze Japan's assets before being at war with Japan. I fully agree that even if China were just at war with Tiawan the US would no longer pay debts to China. However, China is a bit over $1 trillion out of $14 trillion. So removing that does not get rid of half. I expect hyperinflation before the war starts, but we will see. I think China needs at least another 5 years to really get ready for war and I don't think we have 2 years before hyperinflation.

[Lily]

I'm going to mostly go back to lurking here, but it's worth pointing out that

a) Vince's argument here is decisive. He's established his point conclusively, and at this point any reasonable person should be able to see that the evidence shows overwhelmingly that he is right. Fiat currencies are fundamentally different from fully or partially asset-backed ones, and they behave in fundamentally a different manner.

John assumes, without giving any reasons, that this time around will be just like the Great Depression, and that nothing can happen this time if it didn't happen last time. It's a pretty weak argument, and he hasn't added any evidence to support his assertion that this will happen, nor is his analysis informed by historical data on the behavior of different types of currencies. All that supports him is his own interpretation of his generational dynamics theories. Whether or not you agree with me that today is more analogous to 1940 than 1932, I hope I've at least raised some relevant questions as to whether or not John fully understands even these generational theories, which are very new, very complex, and easy to over- or mis-interpret. So it should be clear now that his argument in this case is basically without merit. There are deflationary pressures, but in the end the Fed's need to print money will win out.

and

b) China does NOT need another 5 years to prepare militarily. They could beat us tomorrow morning. As an example of how badly our military system is hollowed out, look at our current situation. The military is supposed to be equipped and manned to the point that it could fight "2.5 wars" or 2 wars against separate superpower nation-state competitors and a simultaneous 'optional' humanitarian or regional war. Back in the early 60's, we probably were really at this level, and even in the 90s we were probably pretty close. But now we're in two complex, messy, long guerrilla insurgencies that each permanently tie up about as many troops as would a mechanized total war against a smallish nation state, and one very small engagement in what is militarily a really tiny war - and we're totally stretched to the limit!

Pick up a copy of Paul Kennedy's The Rise and Fall of the Great Powers for a good explication of the process of imperial acquisition and overreach in western states over the last 500 years. What China is doing to the US now is what states have been doing to each other for hundreds of years, but the really remarkable thing about it is just how big and fast they are doing it. The process is already very far advanced.

[at99sy]

b) China does NOT need another 5 years to prepare militarily. .

It is realistic to expect that any future war between the major powers will include a first strike in the form of a "cyber-attack."
When I was in the Army we used to war game different scenarios and power grids, dams, communication systems kept coming up. This was in the 80's before the internet. We have all seen the terst runs being done all over the world with the "random" net attacks.
China could attack via the internet quite easily. Simply confusing the communication networks , internet systems, power grids etc. would cause havoc; there by weakening our defenses and the ability to react internationally and domestically.
MArtial law would probably be declared and the country would be internally defenseless.

sy

[Higgenbotham]

Not sure I understand this. With real estate prices falling, and the value of these securities at 60% of peak level, the only way I can see the Fed being able to sell these is if they paid less than 60 cents on the dollar for them. But my understanding was they paid close to market value. Anyone know what is going on here?

However, when the Fed buys stuff for $100 and then sells it for $60 they then have dollars in the wild that can not be taken back even if they wait till all their debt comes due and it were all paid. So this is inflationary.

Turns out that the Fed paid less than 60 cents on the dollar for these (the AIG bailout). This report came out today.

The New York Fed plans many more auctions. When Maiden Lane II was set up in late October 2008, it paid $20.5 billion for the portfolio of assets, which had a face value of roughly $39.3 billion.

http://www.marketwatch.com/story/fed-wr ... 2011-04-06

[vincecate]

a) Vince's argument here is decisive. He's established his point conclusively, and at this point any reasonable person should be able to see that the evidence shows overwhelmingly that he is right. Fiat currencies are fundamentally different from fully or partially asset-backed ones, and they behave in fundamentally a different manner.

If everyone understood hyperinflation it would never happen. If even 10% of the people understood hyperinflation it would probably never happen. Might even be that if 1% of the people understood hyperinflation it would never happen. A key feature of hyperinflation is that very few people really understand it.

People, I did not pay Lily to say that, and "Lily" is not some extra alias of mine.

[OLD1953]

Higgs, are you saying the Fed is destroying money or creating money by paying less for assets and then holding them? IOW, if they pay 60 cents for something on the books as a dollar, then somewhere it seems that 40 cents was taken off the balance sheets and that came from the capital of the seller.

Empire : An empire is a state with politico-military dominion of populations who are culturally and ethnically distinct from the imperial (ruling) ethnic group and its culture[3] — unlike a federation, an extensive state voluntarily composed of autonomous states and peoples.

[at99sy]

Seems like just yesterday Portugal was saying "We don't need no stinking bailout!" and today we see that
"Yes! we do need a stinking bailout!" but ONLY $100 Billion or so.
http://www.nytimes.com/2011/04/07/busin ... f=business

But Spain is insistent that "We don't need no stinking bailout!"
http://www.nytimes.com/aponline/2011/04 ... risis.html

ciao!
sy

[Higgenbotham]

Higgs, are you saying the Fed is destroying money or creating money by paying less for assets and then holding them? IOW, if they pay 60 cents for something on the books as a dollar, then somewhere it seems that 40 cents was taken off the balance sheets and that came from the capital of the seller.

If the Fed paid less than face value and then later sold for what they paid, then the assets were effectively written down and money was destroyed compared to the pre-crisis situation. The Fed paid an equal value of liquid money for an asset that was illiquid, then reversed the transaction. I think the theory is the Fed provides liquidity during the crisis and removes it when (they think) the crisis is over. This is only AIG; I can't find any information about what they paid for the other mortgage backed securities.

[Lily]

I keep meaning to quit posting here for a while, but did anyone else notice that the stock market and the yield rate on 30-year US treasury bonds have been decoupling this week? That's very out of the ordinary, and major bad news if it keeps up, which it may well.

Also, I still think Higgenbotham was right on with his guess of a crash on or near April 18th. He may even have been spot on; all the signs are right for that day. A lot depends on what happens tomorrow and this coming week. I think we may be approaching the panic inflection point for this leg of the downcycle.

[Higgenbotham]

I keep meaning to quit posting here for a while, but did anyone else notice that the stock market and the yield rate on 30-year US treasury bonds have been decoupling this week? That's very out of the ordinary, and major bad news if it keeps up, which it may well.

Also, I still think Higgenbotham was right on with his guess of a crash on or near April 18th. He may even have been spot on; all the signs are right for that day. A lot depends on what happens tomorrow and this coming week. I think we may be approaching the panic inflection point for this leg of the downcycle.

The market seems to be doing what it normally does before it crashes. And all those things it normally does before crashing are very well hidden, so the panic could surface quite suddenly. Also, I've mentioned Bernanke's tendency to knee-jerk as he removes his blinders and panics (as he did in August 2007 and see the editorial I just posted in the inflation thread). I see a Bernanke blinder removal and panic as a distinct possibility in the coming days if oil, interest rates, silver, etc., continue to zoom higher. As an example of the subtlety, the interest rate rises you mentioned have been very steep these past 4 or 5 days but have not gone up past their February highs, so there is no alarm or discussion. Doesn't mean it will crash, but the probability looks to be increasing with each day that goes by. And as you said, the timing is lining up perfectly.