Money Supply

[underdose]

I’ll throw out a contrary stance, just to keep the discussion balanced and play devil’s advocate.

Many people, including Peter Schiff of europac.net and John Williams of shadowstats.com consider hyperinflation to be an almost inevitible outcome.

“If one studies the various recessions over the last 50 years, there’s a strong indication that prices will deflate due to heavy demand destruction.”

I would argue that that is not always the case. The stagflation period of the late 1970’s clearly indicates that the adage “inflation is caused by an overheated economy” is simply not true. The Fed does have the means to create more money out of thin air than is evaporating to asset destruction. Helicopter Ben has made his intentions to do such a thing very clear. Maybe the helicopter drop in Japan was not aggressive enough, and maybe the helicopter drop in Zimbabwe today was too aggressive.

Furthermore, the crux of Schiff’s argument is that the US$ is in the historically unique position of being the world’s “reserve currency”. The US has been able to print money, be a net borrower, and be a net importer for decades with relative impunity. Some of the disconnect between CPI and money supply stems for foreign exchange manipulations from countries that export to us, and from the whole world’s willingness to absorb excess dollars and hold them in reserve. Arguably, this is another bubble, another artificial market imbalance, that must correct some day. Home prices could not go to infinity, so had to retreat to come back in line with fundamentals. Likewise the US’s debt to the rest of the world can not go to infinity, so at some point the dollar’s purchase power must more accurately reflect the glut of dollars held in the world. Eventually, the Chinese currency will have to succumb to market forces and strengthen against the dollar. The same is true for the currencies of many oil producing countries. More and more countries will be less and less willing to hold their existing dollar reserves, much less accept newly issued dollars. When that day comes, all those dollars held in reserve will come flooding back to the US. To compound matters, the government will probably print like mad to cover the redemption of treasuries and to meet its growing obligations to social security and medicare.

Peterb, you expect deflation and are holding gold. I expect severe stagflation and am holding gold. It looks like at least we have a consensus, that something really bad is happening, and whichever way it goes, no matter what irrational steps are taken by corrupt and incompetent governments, gold is a safe haven for riding it out.

[peterb]

Underdose, I think those are valid points you bring up. I think history is worth analyzing here as this is not the first bursting of a huge credit bubble on record.
Agreed, the govt is trying like crazy to get inflation going again. And other countries are openly deciding to divest of US dollars. I think we can both agree that govt intervention is taking off at a global level. See Financial Times for various articles.
I guess the question is, will they be successful? Perhaps stagflation is the outcome. If the money they’ve created does not increase the velocity. Or rather, does not get put to uses that grow the economy or increase spending…does it still devalue the US$? Probably, the answer is “yes”. But if other currencies are really no better than the US$ and global demand is being destroyed through a global recession, will this translate into increased prices?

This is the reason I took a position in gold. Most all currencies are starting to behave badly, so perhaps it’s a race to the bottom, which I suspect it is. The world is treating the US$ like a safe haven, but that probably wont last very long. What’s left? Looks like the yellow metal has some kind of future here. Both ElliottWave and candle stick analysis are bullish gold as well. History has gold doing well after a huge credit bubble bursts. But it also favors the senior currency. But can a trillion extra US$ floating around really be a good indicator of it’s soundness?!

Anyone have any other ideas? Contrary opinions are always welcome. As Henry Ford once said,”If I have two executives that always agree with each other, I dont need one of them.”

[peterb]

Underdose, I think those are valid points you bring up. I think history is worth analyzing here as this is not the first bursting of a huge credit bubble on record.
Agreed, the govt is trying like crazy to get inflation going again. And other countries are openly deciding to divest of US dollars. I think we can both agree that govt intervention is taking off at a global level. See Financial Times for various articles.
I guess the question is, will they be successful? Perhaps stagflation is the outcome. If the money they’ve created does not increase the velocity. Or rather, does not get put to uses that grow the economy or increase spending…does it still devalue the US$? Probably, the answer is “yes”. But if other currencies are really no better than the US$ and global demand is being destroyed through a global recession, will this translate into increased prices?

This is the reason I took a position in gold. Most all currencies are starting to behave badly, so perhaps it’s a race to the bottom, which I suspect it is. The world is treating the US$ like a safe haven, but that probably wont last very long. What’s left? Looks like the yellow metal has some kind of future here. Both ElliottWave and candle stick analysis are bullish gold as well. History has gold doing well after a huge credit bubble bursts. But it also favors the senior currency. But can a trillion extra US$ floating around really be a good indicator of it’s soundness?!

Anyone have any other ideas? Contrary opinions are always welcome. As Henry Ford once said,”If I have two executives that always agree with each other, I dont need one of them.”

[peterb]

Underdose, I think those are valid points you bring up. I think history is worth analyzing here as this is not the first bursting of a huge credit bubble on record.
Agreed, the govt is trying like crazy to get inflation going again. And other countries are openly deciding to divest of US dollars. I think we can both agree that govt intervention is taking off at a global level. See Financial Times for various articles.
I guess the question is, will they be successful? Perhaps stagflation is the outcome. If the money they’ve created does not increase the velocity. Or rather, does not get put to uses that grow the economy or increase spending…does it still devalue the US$? Probably, the answer is “yes”. But if other currencies are really no better than the US$ and global demand is being destroyed through a global recession, will this translate into increased prices?

This is the reason I took a position in gold. Most all currencies are starting to behave badly, so perhaps it’s a race to the bottom, which I suspect it is. The world is treating the US$ like a safe haven, but that probably wont last very long. What’s left? Looks like the yellow metal has some kind of future here. Both ElliottWave and candle stick analysis are bullish gold as well. History has gold doing well after a huge credit bubble bursts. But it also favors the senior currency. But can a trillion extra US$ floating around really be a good indicator of it’s soundness?!

Anyone have any other ideas? Contrary opinions are always welcome. As Henry Ford once said,”If I have two executives that always agree with each other, I dont need one of them.”

[peterb]

Underdose, I think those are valid points you bring up. I think history is worth analyzing here as this is not the first bursting of a huge credit bubble on record.
Agreed, the govt is trying like crazy to get inflation going again. And other countries are openly deciding to divest of US dollars. I think we can both agree that govt intervention is taking off at a global level. See Financial Times for various articles.
I guess the question is, will they be successful? Perhaps stagflation is the outcome. If the money they’ve created does not increase the velocity. Or rather, does not get put to uses that grow the economy or increase spending…does it still devalue the US$? Probably, the answer is “yes”. But if other currencies are really no better than the US$ and global demand is being destroyed through a global recession, will this translate into increased prices?

This is the reason I took a position in gold. Most all currencies are starting to behave badly, so perhaps it’s a race to the bottom, which I suspect it is. The world is treating the US$ like a safe haven, but that probably wont last very long. What’s left? Looks like the yellow metal has some kind of future here. Both ElliottWave and candle stick analysis are bullish gold as well. History has gold doing well after a huge credit bubble bursts. But it also favors the senior currency. But can a trillion extra US$ floating around really be a good indicator of it’s soundness?!

Anyone have any other ideas? Contrary opinions are always welcome. As Henry Ford once said,”If I have two executives that always agree with each other, I dont need one of them.”

[peterb]

Underdose, I think those are valid points you bring up. I think history is worth analyzing here as this is not the first bursting of a huge credit bubble on record.
Agreed, the govt is trying like crazy to get inflation going again. And other countries are openly deciding to divest of US dollars. I think we can both agree that govt intervention is taking off at a global level. See Financial Times for various articles.
I guess the question is, will they be successful? Perhaps stagflation is the outcome. If the money they’ve created does not increase the velocity. Or rather, does not get put to uses that grow the economy or increase spending…does it still devalue the US$? Probably, the answer is “yes”. But if other currencies are really no better than the US$ and global demand is being destroyed through a global recession, will this translate into increased prices?

This is the reason I took a position in gold. Most all currencies are starting to behave badly, so perhaps it’s a race to the bottom, which I suspect it is. The world is treating the US$ like a safe haven, but that probably wont last very long. What’s left? Looks like the yellow metal has some kind of future here. Both ElliottWave and candle stick analysis are bullish gold as well. History has gold doing well after a huge credit bubble bursts. But it also favors the senior currency. But can a trillion extra US$ floating around really be a good indicator of it’s soundness?!

Anyone have any other ideas? Contrary opinions are always welcome. As Henry Ford once said,”If I have two executives that always agree with each other, I dont need one of them.”

[ucodegen]

What if, for a moment, you take all currencies, stock and commodities… as commodities. All have a somewhat limited quantities (artificially as well as actually). Then consider that the housing crash destroyed a large portion of the ‘dollar’ commodity (no home ATM, defaulting mortgages, CDOs/MBSs going south). This means that dollars became more ‘rare’ against commodities like gold and against many other currencies.

The second effect that destroying a large portion of the currency through a housing crash would have is to make dollars increasingly more valued and therefore discourage investment… in anything other than the currency itself(deflation). If your dollar will buy you 1 of something today, but 1.2x of the same thing in one month. What type of decision will be made?

Will ‘printing’ more money reverse this? How much more money will have to be printed?
NOTE: Gold is an inflation hedge, but not a deflation hedge.

[ucodegen]

What if, for a moment, you take all currencies, stock and commodities… as commodities. All have a somewhat limited quantities (artificially as well as actually). Then consider that the housing crash destroyed a large portion of the ‘dollar’ commodity (no home ATM, defaulting mortgages, CDOs/MBSs going south). This means that dollars became more ‘rare’ against commodities like gold and against many other currencies.

The second effect that destroying a large portion of the currency through a housing crash would have is to make dollars increasingly more valued and therefore discourage investment… in anything other than the currency itself(deflation). If your dollar will buy you 1 of something today, but 1.2x of the same thing in one month. What type of decision will be made?

Will ‘printing’ more money reverse this? How much more money will have to be printed?
NOTE: Gold is an inflation hedge, but not a deflation hedge.

[ucodegen]

What if, for a moment, you take all currencies, stock and commodities… as commodities. All have a somewhat limited quantities (artificially as well as actually). Then consider that the housing crash destroyed a large portion of the ‘dollar’ commodity (no home ATM, defaulting mortgages, CDOs/MBSs going south). This means that dollars became more ‘rare’ against commodities like gold and against many other currencies.

The second effect that destroying a large portion of the currency through a housing crash would have is to make dollars increasingly more valued and therefore discourage investment… in anything other than the currency itself(deflation). If your dollar will buy you 1 of something today, but 1.2x of the same thing in one month. What type of decision will be made?

Will ‘printing’ more money reverse this? How much more money will have to be printed?
NOTE: Gold is an inflation hedge, but not a deflation hedge.

[ucodegen]

What if, for a moment, you take all currencies, stock and commodities… as commodities. All have a somewhat limited quantities (artificially as well as actually). Then consider that the housing crash destroyed a large portion of the ‘dollar’ commodity (no home ATM, defaulting mortgages, CDOs/MBSs going south). This means that dollars became more ‘rare’ against commodities like gold and against many other currencies.

The second effect that destroying a large portion of the currency through a housing crash would have is to make dollars increasingly more valued and therefore discourage investment… in anything other than the currency itself(deflation). If your dollar will buy you 1 of something today, but 1.2x of the same thing in one month. What type of decision will be made?

Will ‘printing’ more money reverse this? How much more money will have to be printed?
NOTE: Gold is an inflation hedge, but not a deflation hedge.

[ucodegen]

What if, for a moment, you take all currencies, stock and commodities… as commodities. All have a somewhat limited quantities (artificially as well as actually). Then consider that the housing crash destroyed a large portion of the ‘dollar’ commodity (no home ATM, defaulting mortgages, CDOs/MBSs going south). This means that dollars became more ‘rare’ against commodities like gold and against many other currencies.

The second effect that destroying a large portion of the currency through a housing crash would have is to make dollars increasingly more valued and therefore discourage investment… in anything other than the currency itself(deflation). If your dollar will buy you 1 of something today, but 1.2x of the same thing in one month. What type of decision will be made?

Will ‘printing’ more money reverse this? How much more money will have to be printed?
NOTE: Gold is an inflation hedge, but not a deflation hedge.

[stockstradr]

Here’s my spin on the deflation vs. inflation debate. I suggest you read Rich (as in our mighty Piggington.com leader) and Roubini on this topic and its effect long and short term on commodities (very enlightening).

We have strong deflationary forces that will likely dominate short-term. Agreed.

However, the Fed has opened its lending window to investment firms, commercial banks and insurance giants. In some weeks this exceeded 100 billion.

That fiscal stimulus is clearly inflationary…but rate spread data proves those financial institutions are still NOT lending out that money to other financial institutions. In other words, the traditional process of the fed pumping money into the larger financial system via lending to front row firms isn’t really functioning, even though that lending is now going to a much broader range of front row financial institutions.

Plus we got consumers hoarding cash, dramatically reducing spending, pulling money out of financial markets, and even maxing out equity lines of credit (pulling money out of banks). Even corporations are maxing out their revolving credit lines with banks, hoarding cash. Also, no more money coming into consumer pockets from equity re-financing.

So one might conclude that short-term the deflationary pressures are DOMINANT; yet, there is tremendous latent (and excessive?) fiscal stimulus (fed lending) that is held in check by the locked up financial markets not lending to each other. Plus we got those multiple other inflationary pressures held TEMPORARILY in check by the global recession. Plus you can expect the fed will cut rates again, soon.

Finally, we have the BIG QUESTION: when will the world start dumping dollars and trading into something else (gold? Euros? RMB?), as the dollar is unseated as the world’s de-facto reserve currency. That effect will be extremely inflationary for the dollar (more dollars released and less parties holding them or using them in financial transactions)

So let’s integrate all these factors.

CONCLUSION: short-term during this nasty global recession (12 to 18 months) we may well see CPI figures drop to zero or even go slightly into deflation territory….but watch out, because the inflationary pressures are bottled up, and when they explode all hell’s gonna break loose against the dollar.

So either mid-recession, or as the recession ends, we could move into rapidly accelerating decline of the dollar, and that will likely continue for YEARS AND YEARS.

This is why I cut gold back to 25% of portfolio, awaiting some potential better pricing on gold as this recession gets really ugly and deflationary pressures heat up. At the bottom of the recession buy gold and buy oil and dump dollars. That’s a winning strategy.

[stockstradr]

Here’s my spin on the deflation vs. inflation debate. I suggest you read Rich (as in our mighty Piggington.com leader) and Roubini on this topic and its effect long and short term on commodities (very enlightening).

We have strong deflationary forces that will likely dominate short-term. Agreed.

However, the Fed has opened its lending window to investment firms, commercial banks and insurance giants. In some weeks this exceeded 100 billion.

That fiscal stimulus is clearly inflationary…but rate spread data proves those financial institutions are still NOT lending out that money to other financial institutions. In other words, the traditional process of the fed pumping money into the larger financial system via lending to front row firms isn’t really functioning, even though that lending is now going to a much broader range of front row financial institutions.

Plus we got consumers hoarding cash, dramatically reducing spending, pulling money out of financial markets, and even maxing out equity lines of credit (pulling money out of banks). Even corporations are maxing out their revolving credit lines with banks, hoarding cash. Also, no more money coming into consumer pockets from equity re-financing.

So one might conclude that short-term the deflationary pressures are DOMINANT; yet, there is tremendous latent (and excessive?) fiscal stimulus (fed lending) that is held in check by the locked up financial markets not lending to each other. Plus we got those multiple other inflationary pressures held TEMPORARILY in check by the global recession. Plus you can expect the fed will cut rates again, soon.

Finally, we have the BIG QUESTION: when will the world start dumping dollars and trading into something else (gold? Euros? RMB?), as the dollar is unseated as the world’s de-facto reserve currency. That effect will be extremely inflationary for the dollar (more dollars released and less parties holding them or using them in financial transactions)

So let’s integrate all these factors.

CONCLUSION: short-term during this nasty global recession (12 to 18 months) we may well see CPI figures drop to zero or even go slightly into deflation territory….but watch out, because the inflationary pressures are bottled up, and when they explode all hell’s gonna break loose against the dollar.

So either mid-recession, or as the recession ends, we could move into rapidly accelerating decline of the dollar, and that will likely continue for YEARS AND YEARS.

This is why I cut gold back to 25% of portfolio, awaiting some potential better pricing on gold as this recession gets really ugly and deflationary pressures heat up. At the bottom of the recession buy gold and buy oil and dump dollars. That’s a winning strategy.

[stockstradr]

Here’s my spin on the deflation vs. inflation debate. I suggest you read Rich (as in our mighty Piggington.com leader) and Roubini on this topic and its effect long and short term on commodities (very enlightening).

We have strong deflationary forces that will likely dominate short-term. Agreed.

However, the Fed has opened its lending window to investment firms, commercial banks and insurance giants. In some weeks this exceeded 100 billion.

That fiscal stimulus is clearly inflationary…but rate spread data proves those financial institutions are still NOT lending out that money to other financial institutions. In other words, the traditional process of the fed pumping money into the larger financial system via lending to front row firms isn’t really functioning, even though that lending is now going to a much broader range of front row financial institutions.

Plus we got consumers hoarding cash, dramatically reducing spending, pulling money out of financial markets, and even maxing out equity lines of credit (pulling money out of banks). Even corporations are maxing out their revolving credit lines with banks, hoarding cash. Also, no more money coming into consumer pockets from equity re-financing.

So one might conclude that short-term the deflationary pressures are DOMINANT; yet, there is tremendous latent (and excessive?) fiscal stimulus (fed lending) that is held in check by the locked up financial markets not lending to each other. Plus we got those multiple other inflationary pressures held TEMPORARILY in check by the global recession. Plus you can expect the fed will cut rates again, soon.

Finally, we have the BIG QUESTION: when will the world start dumping dollars and trading into something else (gold? Euros? RMB?), as the dollar is unseated as the world’s de-facto reserve currency. That effect will be extremely inflationary for the dollar (more dollars released and less parties holding them or using them in financial transactions)

So let’s integrate all these factors.

CONCLUSION: short-term during this nasty global recession (12 to 18 months) we may well see CPI figures drop to zero or even go slightly into deflation territory….but watch out, because the inflationary pressures are bottled up, and when they explode all hell’s gonna break loose against the dollar.

So either mid-recession, or as the recession ends, we could move into rapidly accelerating decline of the dollar, and that will likely continue for YEARS AND YEARS.

This is why I cut gold back to 25% of portfolio, awaiting some potential better pricing on gold as this recession gets really ugly and deflationary pressures heat up. At the bottom of the recession buy gold and buy oil and dump dollars. That’s a winning strategy.

[stockstradr]

Here’s my spin on the deflation vs. inflation debate. I suggest you read Rich (as in our mighty Piggington.com leader) and Roubini on this topic and its effect long and short term on commodities (very enlightening).

We have strong deflationary forces that will likely dominate short-term. Agreed.

However, the Fed has opened its lending window to investment firms, commercial banks and insurance giants. In some weeks this exceeded 100 billion.

That fiscal stimulus is clearly inflationary…but rate spread data proves those financial institutions are still NOT lending out that money to other financial institutions. In other words, the traditional process of the fed pumping money into the larger financial system via lending to front row firms isn’t really functioning, even though that lending is now going to a much broader range of front row financial institutions.

Plus we got consumers hoarding cash, dramatically reducing spending, pulling money out of financial markets, and even maxing out equity lines of credit (pulling money out of banks). Even corporations are maxing out their revolving credit lines with banks, hoarding cash. Also, no more money coming into consumer pockets from equity re-financing.

So one might conclude that short-term the deflationary pressures are DOMINANT; yet, there is tremendous latent (and excessive?) fiscal stimulus (fed lending) that is held in check by the locked up financial markets not lending to each other. Plus we got those multiple other inflationary pressures held TEMPORARILY in check by the global recession. Plus you can expect the fed will cut rates again, soon.

Finally, we have the BIG QUESTION: when will the world start dumping dollars and trading into something else (gold? Euros? RMB?), as the dollar is unseated as the world’s de-facto reserve currency. That effect will be extremely inflationary for the dollar (more dollars released and less parties holding them or using them in financial transactions)

So let’s integrate all these factors.

CONCLUSION: short-term during this nasty global recession (12 to 18 months) we may well see CPI figures drop to zero or even go slightly into deflation territory….but watch out, because the inflationary pressures are bottled up, and when they explode all hell’s gonna break loose against the dollar.

So either mid-recession, or as the recession ends, we could move into rapidly accelerating decline of the dollar, and that will likely continue for YEARS AND YEARS.

This is why I cut gold back to 25% of portfolio, awaiting some potential better pricing on gold as this recession gets really ugly and deflationary pressures heat up. At the bottom of the recession buy gold and buy oil and dump dollars. That’s a winning strategy.

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