Posted on 03/11/2013 8:22:24 AM PDT by blam
Deflation Coming Soon
Economics / Deflation
March 11, 2013 - 01:28 PM GMT
By: Andrew McKillop
HOW FAR CAN THE ECONOMY DEFLATE?
One predictable whine comes from longtime George Soros partner Jim Rogers, who says we are at a "peculiar time in world history". He decries the growing uncertainty, what he calls the recklessness, of "economic recovery action" by global central bankers, and the related action by government policy makers, as world finance markets enter "unchartered waters". These waters have a growing population of sharks, including distressed asset sharks. Their food base is abundant. Distressed assets, penny-on-the-dollar deals are abundant. They are not threatened by imminent reduction - let alone by global warming - bcause the global economy is deflating.
Distressed assets mean asset deflation. This in fact is highly normal in a deflating economy. As Bill Clinton said: "Its the economy, stupid!"
Th problem for folks like Jim Rogers is that not for the first time in recorded history, but at an unprecedented scale, we have the majority of central banks issuing money. Also unprecedented, the bankers often make an unambiguous or naked admission that they want inflation to return through the simplest of all mechanisms - debasing their currencies. This open admission has never happened before.
However, adding spice to the story, the economy's performance and the velocity of money circulation in the economy have "played contrarian": economic gorwth is at best "tepid" in nearly all OECD former-richworld countries, and money velocity is at all times, almost everywhere, worldwide, running lower than previous. This is deflation.
This is what we call a "de facto situation", rather like the very low number of sunspots in Sunspot cycle 24. And there is nothing we can do about it.
KISS AND TELL
One of the biggest problems facing "Kiss and Tell" (the latest lie) central bankers, in their debasing strategy, is that any observer of this grotesque Money Play will instantly see that when a currency is going down, like the GB pound or Japanese Yen at this time, the real question is: Against what?
Normally, we would find solace along with Jim Rogers and other Gold Bugs. We would see that gold bullion and mining stocks were calmly inflating up, and up, or "appreciating" in debased currency units. Unfortunately, again like Sunspot cycle 24, this is not turning out to be the case: this year's peak of the cycle is likely to be the weakest since 1906, a year with a chilly, long and dry Springtime in Europe, followed by a short, hot and stormy Summer.
As for "Peak Gold" that also might be history and may already be 2 full years behind us.
Jim Rogers, unlike George Soros or Louis Moore Bacon is however staying long on gold, silver, the agro commodities and other "hard assets", while he also holds on to his US dollars, but not from any feeling they are a hedge.
As he put it when talking to Business Insider, March 10th: "I own the dollar, not because I have any confidence in the dollar and not because it’s sound – it’s a terribly flawed currency – but I expect more currency turmoil, more financial turmoil".
Any flight to the dollar will most certainly and surely be bad, or very bad news to Ben Bernanke, but a flight to the dollar may already be in the works. Again normally speaking, this could or should mean higher interest rates, but in no way means inflation. When people, companies, and countries for whatever reason flee to the US dollar as a safe haven, their perception of it being a safe haven makes it into one. US dollar interest rates rise. Inflation declines.
A rising dollar on the back of economic slow growth or stagnation, and even outright contraction in several major economies, is also very bad news for Jim Rogers' not-so-hard assets, almost all of them denominated and traded in dollars. Dollar up. Commodities down.
Although still having a science fiction edge to it, a global flight to the dollar process would signal very unusual things, and strange mechanisms at work in the world. One fast spinoff is already signalled by Indian government action - firm action - to slow or stop traditional Indian gold-buying, mostly for jewelry. Indian official reasoning is this traditional buying, in today's very un-traditional cirumstances will or can lead to further inflation.
Put another way, not buying gold is deflationary in today's Indian official economic readout of what is happening. For many analysts a linked and related policy, even inevitable, India has slipped back to trade deficit and net debitor status with the rest of the world.
DOLLAR COLLAPSE?
The myth of dollar collapse is a long-running fairy tale, stretching back to Jimmy Carter and Richard Nixon. Supporters of the myth of course have mucho-ammunition, for example China and Germany agreeing to conduct "an increasing amount of trade" with each other in their own currencies, gold buying sprees by Hong Kong citizens, the performance of gold bullion through the ten years 2000-2011 but not since, and of course petroleum's reality-free price growth, at least until now.
The list of claimed reasons for imminent dollar collapse (against what?), usually include ever rising oil prices, of course running with higher gold prices, higher food prices, generalized inflation, fewer buyers of US debt, and supposedly logical corollaries of this like lower interest rates outside the US but higher rates inside. Add in the geopolitical frills and thrills, like an Israeli military strike against Iran's nuclear assets, and Bob's your uncle. Bingo! Jim Rogers' gold and hard assets (and the dollar) fly and he doubles his money!
If however oil prices did continue to rise, given that about 70% of all traded oil is paid for in dollars, this alone, even without an irradiated Tehran would help maintain international demand for dollars. Even better however, declining or stagnating oil purchases and settlement in other moneys, or by barter deals with offset trades, all of these also tend to reinforce the US dollar's world value!
Reduced purchases of US debt can also, quite easily, reinforce the world value of the dollar, or at least create problems for Bernanke when trying to debase its value with QE Infinity. Interest rates have to rise, the dollar strengthens, deflation continues.
Worst of all however, for the Dollar Decline mythmakers, rising interest rates are pressured by US dollar appreciation, revaluation, or growth in its relative value against other currencies, but the reasons for this can seem as hazy as the answers you will get when asking astrophysicists why Sunspot cycle 24 is so weak. What concerns us is the economy, stupid. This will deflate further, when and if the US dollar appreciates.
When this happens isnt at all sure, this is astrophysics! But we could suggest its already long overdue.
Later
Great find, thanks!
Deport Jim Rogers to his beloved China
Perplexing.
Maybe we need to measure money momentum ($in circ X money velocity)or money kinetic energy($in circ X money velocity^2)?
When the QE 2 billion a day printing press stops, the house of cards will collapse.
The average price of a new car in 1972 was $4,500. Now it's $ 30,748. In 1972 a loaf of bread went for Quarter. Now it's $2.49.
The currency is collapsing. The Fed; has us in a liquidity trap. It cannot stop floating the stock market, it cannot get the banks off life support, it cannot stop QE and it cannot raise interest rates.
The only way out is default or war - probably one then the other.
At first I dismissed this article. Common snese economics suggests that pumping manufactured money into an economy causes inflation (whether by printing or lending). You can’t have inflation and deflation at the same time can you? Maybe so....
I have to admit I have been curious about how prices continue to climb in comodities (inflation and currency value drop?) while the typically appreciating asset values are stagnant or dropping. With interest rates low, money has no value in savings Vs. inflation. Still, there is cash on hand for investments in the stock market (because it’s better than savings?). I don’t understand the confidence in future returns for the investment market.
The stock market reminds me of 1999. It’s bullish nature does not reflect future economic expectation. That is, corporate performance expectations do not have a consistent or common thread that would justify universal expecations of higher investment returns (Are people “storing” money in the market?).
This article may suggest that runnaway inflation is already occuring and is (oddly and simultaneously) countering deflation. Maybe an economist can help here. Shouldn’t these two curves be in line with each other? Is this even possible? How do they come back together and what are the consequence? It can’t be good.
Other countries are starting to trade in currencies other than the dollar. Once the dollar is not the only game in town, everything can change.
There is still vitrualy no use of natural gas for transportation. I want to hear about industries that have switched to natural gas...so far it is slow going. Hopefully homeowners are switching to natural gas and giving up oil (heat) and electric heat and cooking as much as they can. No natural gas lines run to my house. I have to use electric unless I put in a propane tank
He self-deported, long ago, to Singapore.
bfl
And, what if they don't stop?
That's exactly my take on the situation.
The author is saying there is almost no place to invest your money.
“The Fed; has us in a liquidity trap. It cannot stop floating the stock market, it cannot get the banks off life support, it cannot stop QE and it cannot raise interest rates. “
That’s exactly my take on the situation.
The currency is collapsing. The Fed; has us in a liquidity trap. It cannot stop floating the stock market, it cannot get the banks off life support, it cannot stop QE and it cannot raise interest rates.
The only way out is default or war - probably one then the other.
I have the SAME expectation.
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