Deflation Has Arrived

Safehaven ^ | 01.28.04 | Robert Prechter

[Iconoclast2]

How depressing.

[Southack]

"This theory is viable for debate; maybe not in Prechter's world or concepts, but it is a viable debate. Thus why I feel the dollar will become the Weimar dollar of the 21st Century."

Totally different situation today than 1924 Germany.

The U.S. is the largest importer in the world. That makes us the biggest customer.

But if the value of the Dollar declines too much, that will make foreign goods too expensive for Americans to purchase.

At that point, it is the economies of all foreign export-driven nations that will collapse.

But don't fault yourself for not seeing that point. Many esteemed economists on Wall Street still think that it would hurt the U.S. if our Dollar fell, rather than figuring out that it will actually aid the U.S. by making our goods and services cheaper to export.

What's still going on today is that Taiwan, China, India, and to a lesser degree Japan and the EU are all buying Dollars in an effort to prop up our currency. Their central bankers are clever enough to know that they need their best customer to be rich enough to purchase all of their exports. If the Dollar collapses, then their exports to us will be too expensive.

Their very survival depends upon the U.S. being able to buy most of their exports. They can't afford for the U.S. Dollar to become worthless.

But on the other hand, imports and exports are only 15% of the U.S. economy. You've heard of the 80 - 20 rule. Well, in this global game it is the 85% to 15% rule. The rest of the world could cease to exist and 85% of our economy wouldn't even know it. The Dollar could collapse and we'd simply increase our existing factory utilization rates to make up for the demand in [what were once foreign supplied] goods.

So our incentive for maintaining an over-valued Dollar is pretty darn low...possibly even negative.

Let the Dollar crash to 1000 Dollars per Yuan. Let it crash to 10 Dollars to the Euro. Who cares?!

Not you. Not me. Our homes will still be worth the same number of Dollars. Our investments will be unphased (mostly), and our savings will still have the same domestic purchasing power.

Vacations to Europe and Asia would be a bit out of the question, but we'd simply travel more domestically rather than overseas.

And the central bankers in Europe and Asia know these things full well. They know that they have to keep our Dollar propped up or it is Game Over for their own export-based economies.

They can't afford to lose their biggest customer, and that's what a declining Dollar would do to them.

[Dec31,1999]

Does anyone have any learning on what happens to gold in times of deflation?

Doesn't there have to be a crash before true deflation takes hold? And if the gov't prints its way out of the crisis, doesn't that give rise to an inflationary depression instead? I think the author is mistaken. He's been preaching deflation for years, but the ironic part is that the coming collapse will probably be inflationary, not the opposite.

[AdamSelene235]

Let the Dollar crash to 1000 Dollars per Yuan. Let it crash to 10 Dollars to the Euro. Who cares?!

Let it crash to $100 a barrel of Light Sweet Crude !!!

We're invincible !!!

You've been telling us that oil is going come back down to the $20's for some time now.

When, Southack, When?

[XBob]

76-"The Federal Reserve's answer to "how much money and when" is a vector sum of people, half of whom have been appointed by bankers, and the other half by politicians. This was a stroke of genius, because politicians can always be relied on to advocate for easy money, and even inflation, because it's a hidden tax. Meanwhile, the bankers hate inflation because lenders are hosed by inflation. In fact bankers want deflation, so that the money they're paid back is worth more than the money they lent out. Find the vector sum of what some studious people with those self-interests want, and the odds are, you're between the hash marks most of the time.... even though none of 'em really know for sure until waaaay later whether they were right."

very astute

[Southack]

"You've been telling us that oil is going come back down to the $20's for some time now. When, Southack, When?"

I think that we can safely conclude that I was wrong about $25 oil, certainly for the short term.

On the other hand, my oil stocks have performed rather well...so at least I've made good money even while being wrong.

[SAJ]

''Main Street'' would prefer also that politicians actually represent constituencies, that laws actually be enforced in an even-handed fashion, and that citizens get at least some amount of value in return for their tax dollars.

OK, none of these results occur, or only rarely so, and therefore it's both fair and accurate to observe that Main Street is, effectively with regard to both the political and financial worlds, smoking dope.

I don't particularly like this result, mind you, having dealt with the Wally St. World types for 25+ years, but the fact of the matter is that, financially at least, this lot rule the roost.

Former President Eisenhower's famed warning about the ''military-industrial complex'' absolutely **PALES** in its menace, in comparison to today's politico-financial complex.

[dpwiener]

so, dpw, it would be higly desirable to deflate (decrease) your salary, while your loan amount increases (due to interest), and decrease your salary as you get more experience ???

On average it would be desirable to deflate people's salaries if overall price levels were dropping at least as fast, and preferably much faster, due to increased productivity and technological improvements. If my salary drops from $100k this year to $98k next year, but prices have dropped so much that the real (deflation-adjusted) value of my wages is $102k, why shouldn't I be happy? I can buy more than I could before, and under our progressive income tax system my real tax bite declines.

Of course this is just one example. Depending upon an employee's actual worth, his or her nominal wages might still go up or down even in a deflationary environment. If a person had skills and experience which were heavily in demand, that person might still be able to command a raise from $100k to $105k even while most others workers were seeing their salaries fall.

As far as loans go, a stable (or at least predictable) money supply would be factored into the borrowing costs and interest rates when the loan was first taken out (or else it could be refinanced).

[RadioAstronomer]

bttt for later read.

[abbi_normal_2]

bookmark at 100

[AdamSelene235]

On the other hand, my oil stocks have performed rather well...so at least I've made good money even while being wrong.

A cynic might think you do not allow your political biases to extend to your investment strategy.