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Monday, April 08, 2013

Inflation vs Deflation IX

Nate begins the eighth installment in the series by getting some things factually incorrect. To begin with, Z1 did not begin to decline in July 2008, as it peaked at $52.9 trillion in Q1 2009, a figure it did not reach again until Q3 2011, when it hit $53.8 trillion. 2008 merely served as the warning sign, as total credit growth ceased to keep pace with its 60-year historical rate, thus triggering two quarters of 10 percent growth in the federal debt sector in the latter part of the year. Gold and silver prices certainly did rise during that time, as did the stock market, but this was the result of the near-unprecedented increase in federal spending which was taking place at that time; even as the Household and Financial sectors contracted, the Federal sector expanded by $3.3 trillion.

Merely that Federal expansion, you will note, is considerably greater than the increase in savings over the same period. In fact, it is $1.2 trillion more than the total amount of extant currency plus demand deposits. And note that the government economists appear to have been keenly aware of the warning provided by the debt disinflation, (which you may recall was characterized as the "credit crunch" at the time), as the massive increase in government borrowing preceded the actual debt deflation by three quarters.

As Mises and others have remarked, inflation does not affect every sector of the economy at once. That is the whole reason it is desired by certain economic actors; they expect to benefit disproportionately from being able to spend less expensive money at its previous value. Nate's tangent into malinvestment isn't completely irrelevant, as real estate was certainly one of the primary areas of malinvestment, along with the health care and higher education sectors, but isn't of particular importance because my case is not dependent upon housing prices. I have merely pointed it out because it shows that the inflation, despite massive reinflationary efforts, hasn't been enough to counteract four years of ongoing credit contraction across the economy.

Nate is looking at Z1 - or to be more precise, L1 - as a whole rather than in its component parts. This is not unreasonable, but unless one looks at the component parts, one cannot understand the importance or the consequences of the shift in the nature of the credit market that has seen the federal element double from 10.3 percent of the entire credit market to the current 20.6 percent.

What Nate sees as evidence of inflation, the modestly higher prices in the gold, silver, and equity markets, is largely limited to the areas of direct federal intervention.  This is why health care and higher education prices are still rising to new heights, while real estate prices are struggling to get back to where they were.  The areas that are reaching new heights are where the outstanding $11.6 trillion in government credit is flowing.  That is where the malinvestment is still being directed.

I will not dig further into Nate's answers. I don't know the answer to them either, the point was to direct attention to what Nate sees as significant, which is the total amount of savings and the cash in the various banks. What Cyprus should have sufficed to demonstrate was that the greater part of the "savings" he cites do not exist in any material capacity except as debt claims.  As has been repeatedly pointed out here, deposits are legally defined as debts owed by the bank to the depositor and therefore qualify as credit money even before they are subsequently loaned out, and "multiplied".

Now, Nate concludes with citing the 56 recorded historical incidents of hyperinflation. It is true that hyperinflation is possible within a nominal credit money system, (especially in the broader sense in which Mises and I question the existence of true fiat money), but that is not to say that all credit money systems are created alike.

I note that each of these hyperinflationary scenarios were very short-lived and tended to be closely tied to serious political upheaval.  The longest period is two years, which happened twice in China during the 1940s.  Note, however, that these hyperinflations tended to take place AFTER the wars or major political upheavals; the frequency with which they take place after independence is gained by a nation is reminiscent of the high inflation that plagued the American colonial currencies and the Continental Dollar.  If any hyperinflation were to take place, history suggests it would likely take place after the collapse and political chaos; it would be a result of it, not a cause.

What Nate omits to mention is that there have been even more sovereign defaults, which he concedes are deflationary, than hyperinflations since the first hyperinflation on his list took place in 1919.

Nate is correct to say that one must be careful not to mistake "can't" with "won't". But his flight analogy fails, because I am not claiming that something must be lighter than air to fly in defiance of the 56 airplanes soaring overhead, but rather, pointing to a particular vehicle, constructed from empty shipping containers and bound together with string, chewing gum, and tefillin straps, watching the pilot repeatedly taxi up and down the tarmac, and expressing my doubts that it is going to take flight.

We have seen massive increases in virtual every monetary measure. We have been told to expect considerably inflation. And yet, we are still not seeing a rise in general prices concomitant with the size of the expansion. Ben and Mario are monetizing the debt like mad. Kuroda is acting even more aggressively. To the extent their efforts to expand the limited amount of inflation they have created in the financial markets and move money out of the bank reserves and into the general economy have failed, the situation appears to be more "can't" than "won't".

Remember, it's not enough to merely print the money. The amount printed and distributed has to be greater than the continuing contraction of private credit and the evaporation of bank deposits.  And keep in mind that the combined $4.2 trillion decline in outstanding Household and Financial sector credit since 2009 alone exceeds, by a factor of nearly four, the ENTIRE AMOUNT of U.S. currency presently in circulation.

The amount of credit outstanding is simply too great for helicopter dropping of actual cash and coins to be able to compensate for much of it. And simply flipping an electronic switch and adding a zero to everyone's bank account isn't going to change anything at all because the entire financial system depends upon inflation working its way gradually through it.

Nate is correct to note that people are becoming increasingly drawn to holding cash in the hand, but he is forgetting that when cash becomes more valuable in this manner, it is strongly indicative of a deflationary environment, not an inflationary one.  In an inflationary environment, one wants to take on more debt and hold less cash. In a deflationary environment, one wants to avoid debt and hold more cash.  The intellectual gymnastics notwithstanding, one's true position on this matter can be ascertained by one's material preferences and actions.

"In fact, a money that is continually depreciating becomes useless even for cash transactions. Everybody attempts to minimize his cash reserves, which are a source of continual loss. Incoming money is spent as quickly as possible, and in the purchases that are made in order to obtain goods with a stable value in place of the depreciating money even higher prices will be agreed to than would otherwise be in accordance with market conditions at the time. When commodities that are not needed at all or at least not at the moment are purchased in order to avoid the holding of notes, then the process of extrusion of the notes from use as a general medium of exchange has already begun. It is the beginning of the 'demonetization' of the notes."
- Mises, The Theory of Money and Credit, p. 227

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95 Comments:

Anonymous Stilicho April 08, 2013 7:24 AM  

Remember, it's not enough to merely print the money. The amount printed has to be greater than the continuing collapse of private credit and the evaporation of bank deposits. And keep in mind that just the combined $4.2 trillion decline in outstanding Household and Financial sector credit since 2009 exceeds, by a factor of nearly four, the ENTIRE AMOUNT of U.S. currency presently in circulation.

This is the heart of the matter. IIRC, that decline also significantly exceeds the increase in M2 over that period. What happens when the Fed throws an inflation party and no one comes? We are back to Keen's dilemma of the banksters desperately seeking what they believe are credit worthy borrowers and finding relatively few who want to borrow. The Fed is engaging in massive price control by manipulating the price of dollars (interest) which affects the price of everything that is, in turn, priced in that money. Yet, outside federal debt and debt subsidized by the federal government (student loans), we do not see the the debt increase that should follow such a price signal in the static model used by Neo-Keynesians and Monetarists.

Anonymous First Is April 08, 2013 7:25 AM  

Crickets!

Anonymous zen0 April 08, 2013 7:26 AM  

Crickets is second.

Anonymous Josh April 08, 2013 7:29 AM  

The chili is strong with this one, Vox.

Blogger Positive Dennis April 08, 2013 7:30 AM  

It seems likely to me that when the fecal matter hits the air circulation device we will not be offered one solution but several. There will be inflation, just not hyperinflation. There will be large tax increases, large spending cuts, and increase monetization of debt, all at once.

Anonymous Toby Temple April 08, 2013 7:32 AM  

Now that is a come back.

Anonymous TheExpat April 08, 2013 7:47 AM  

The deflationary mindset of wanting to hold cash in hand is corroborated by the velocity statistics kept by the St. Louis Fed .

Anonymous Rantor April 08, 2013 7:54 AM  

@Positive Dennis... if the Cyprus model catches on, you will see deflation as your money is taken, via tax or smash and grab from your fingers.

It's all too easy in this digital world.

Blogger Nate April 08, 2013 8:01 AM  

Just a few quick thinks.

Prices didn't go up just in Gold, Silver, and the equity markets. They went up in literally everything. Cars. Copper. Food. Ammo. Guns. Clothes.

Living in Europe... you didn't notice. And prices are still going up.

Anonymous Salt April 08, 2013 8:16 AM  

Nate, guns are way up due to demand. Same for ammo. That's the Obama effect, not the Bernanke.

Blogger Nate April 08, 2013 8:17 AM  

"if the Cyprus model catches on, you will see deflation as your money is taken, via tax or smash and grab from your fingers."

The cyprus model won't work in the US for the same reason it wouldn't work in Ireland.

There isn't enough money to confiscate to solve the problem.

Anonymous zen0 April 08, 2013 8:22 AM  

Prices didn't go up just in Gold, Silver, and the equity markets.

Here is an interactive chart showing inflation rates in commodities. It just doesn't have percentages. If someone can figure it out, let me know.

U.S. Inflation Rate for Commodities

Shows everything going up except purchasing power.

Anonymous ODG April 08, 2013 8:23 AM  

"There isn't enough money to confiscate to solve the problem."

Logic is not the strong suit of TPTB. Idealism is.

Anonymous jm April 08, 2013 8:31 AM  

OT: The Iron Lady has passed away, age 87.

Anonymous VD April 08, 2013 8:40 AM  

Living in Europe... you didn't notice. And prices are still going up.

I am aware they are going up. Even housing prices have gone up in the last year. But they are not going up anywhere nearly as much as the theory indicates they should be given the massive monetization and smoking printing presses.

And this is while the credit collapse is being staved off in every possible way, legitimate and fraudulent.

Anonymous VD April 08, 2013 8:41 AM  

The cyprus model won't work in the US for the same reason it wouldn't work in Ireland.

It won't work in Cyprus, for that matter. But neither will printing lots of money.

Anonymous Toby Temple April 08, 2013 8:56 AM  

It won't work in Cyprus, for that matter. But neither will printing lots of money.

How so? If the FDR decides to print a $10,000 bill and reprint it a million times, that's 10 trillion US dollars. Just add one more zero to the bill and you have $100 trillion.

$54 trillion of debt paid with $47 trillion to spare.

Anonymous Toby Temple April 08, 2013 8:57 AM  

correction: that is $46 trillion to spare

Blogger IM2L844 April 08, 2013 8:57 AM  

...they are not going up anywhere nearly as much as the theory indicates they should be...

I sense a disturbance in the Chili.

Anonymous Joe Doakes April 08, 2013 8:57 AM  

when I pull money out of the bank, Nate says that's a sign of inflation. I should invest in things with stable value like gold.

When I pull money out of the bank, Vox quotes Mises to say that's deflation. I should invest in things with stable value like gold.

Is this another one of your elaborate jokes, guys? Cuz it's not nice to make fun of us economic retards.
.

Blogger Nate April 08, 2013 8:59 AM  

"And this is while the credit collapse is being staved off in every possible way, legitimate and fraudulent."

On this we agree.

Where we disagree.. is your bizarre notion that they are somehow "struggling" to do so.

The counterfeiter doesn't struggle. He merely decides.

Anonymous Toby Temple April 08, 2013 9:00 AM  

pulling your money out of the bank increases the supply of money. ergo it causes inflation

Anonymous Van April 08, 2013 9:07 AM  

So we have a tug-of-war between inflationary and deflationary forces? Churning printing presses while credit collapses. What happens when one side lets go of the rope?

Blogger Nate April 08, 2013 9:08 AM  


"
It won't work in Cyprus, for that matter. But neither will printing lots of money."

We're not debating "working". We're debating various flavors of Doom. Cyprus is a tiny experiment where by the eurotrash banksters determined their tactics may in fact serve to facilitate whatever bizarre goal they had in mind.

Blogger Nate April 08, 2013 9:10 AM  

"So we have a tug-of-war between inflationary and deflationary forces? Churning printing presses while credit collapses. What happens when one side lets go of the rope?"

Doom.

Vox is arguing the rope will get jerked out of the banksters hands. I am arguing that the banksters will pull so hard they jerk themselves into the muck in the middle.

Blogger Nate April 08, 2013 9:12 AM  

"pulling your money out of the bank increases the supply of money. ergo it causes inflation"

No.

Anonymous Toby Temple April 08, 2013 9:17 AM  

Why?

Anonymous Salt April 08, 2013 9:26 AM  

Vox is arguing the rope will get jerked out of the banksters hands.

That's not how I understand it. The Banksters can't make enough rope fast enough. And what they do make, most people don't want any.

Anonymous JartStar April 08, 2013 9:26 AM  

Vox is arguing the rope will get jerked out of the banksters hands. I am arguing that the banksters will pull so hard they jerk themselves into the muck in the middle.

I can see both happening almost simultaneously in a massive cluster at the end.

Anonymous Matt April 08, 2013 9:43 AM  

Why?

Because when you put $100 in the bank, the bank loans (say) $90 of it to someone else. He spends that money, and the people he purchased from put $90 in their bank. That bank loans (say) $81 of it to someone else, and the process repeats.

This is the so-called multiple expansion of the money supply. The dollar you put in the bank ends up causing many dollars to appear in many other bank accounts.

It works in reverse too. Taking money out of the bank reduces the bank's ability to loan, and this wipes out all that downstream created money as well.

Anonymous John Regan April 08, 2013 9:55 AM  

@Nate: You're fundamentally misunderstanding. The infamous Ben Bernanke "helicopter" comments were intended to be humorous. VD is of course correct that even if they did something like that it wouldn't solve the problem they are facing.

The "struggle" for the fed and the other central banks, like Japan's which has recently announced an incredible QE plan of its own, is that the monetary system is precisely, exactly, a ponzi scheme in every sense. It requires "new" money to come online to payoff the obligations from "old" money.

There is only one way "new" money comes online: it is borrowed into existence.

So just like any ponzi scheme, everything is fine as long as population and economic activity - and thus borrowing - increases. In a manner of speaking. Because also just like any ponzi scheme, the denouement is built in and inevitable. It's not a question of if, it's a question of when.

The vast, vast majority of money is created by the banking system through lending, not the central bank itself. Another critical thing to understand: the new money is always lent. That is, it is always owed back in by someone. That is the control lever for the whole thing.

So, to review: the subprime crisis indicated that the money creation process that had previously worked was seizing up: there was no longer a private sector borrowing pool worthy of the name. Banks were lending to people who demonstrably could never repay, because if they didn't keep lending the ponzi scheme would be exposed and financial armageddon would be upon us.

The "solution"? Allow TBTF banks to absorb the now plainly insolvent mortgage lenders and banks so that denial can be maintained, and have the borrower of last resort - the United States government - fill the role of bringing "new"money online by borrowing like crazy.

The immediate problem? All the new money is stuck in banks or being lavished on government workers and contractors in the DC area. This is why the "richest" places in the entire country, at least in terms of income, are the localities around Washington, DC.

The longer term problem? How credible is the USG as a debtor when its deficits, and long term debt, are so astronomically high? Put another way, when does the USG get exposed as hopelessly unable to repay, just like the subprime borrowers were?

Well, that's one long term problem anyway. There are others.

So in essence, the problem is unpayable debt,and the only possible solution to that is to make the debt go away, one way or the other. Which the system cannot do because it is directly contrary to its design. The whole idea of the PTB, then, is to PRESERVE the monetary system, which is the system that gives them their position. That means preserving the existing debt while you try to minimize its deleterious impact, which you can only do to an increasingly limited degree as time goes on.

And this is what the chronically low interest rate environment is for. It is not to make borrowing cheaper, although it has that collateral effect, to the extent anyone other than the USG is borrowing at all. It is, rather, to preserve the perceived value of the monetary system's already existing obligations. To placate the creditors, who would otherwise be extremely nervous.

The situation has almost nothing to do with "paper money" or "printing".

Blogger Conan the Cimmerian April 08, 2013 9:58 AM  

What Nate sees as evidence of inflation, the modestly higher prices in the gold, silver, and equity markets, is largely limited to the areas of direct federal intervention.

Modestly higher prices?

I am not seeing modestly higher anything. It has been a fairly considerable up and up.

And haven't the banks been flooding the markets with gold and silver in an effort to suppress prices? That has been the rumours/reports anyhow.

Everything has been going up, it seems, other than housing/real estate.

That is my anecdote anyway.

Anonymous John Regan April 08, 2013 10:04 AM  

Bottom line is, we are looking at debt disinflation that will eventually segue into outright deflation. It might be possible to ameliorate this trend, maybe even for a long time, but neither you nor anyone else will like the "solutions", the most politically palatable of which would be probably greatly increased immigration plus some level of "austerity". There are much, much better solutions - a jubilee, for example - but these solutions are completely unacceptable to those in power.

It really is a difficult problem, largely for political reasons not economic ones. Economically speaking, the fact that system wide debt is unpayable is utterly obvious to any sane and reasonably informed and intelligent person, which in turn makes the solution obvious, albeit not easily implemented.

Blogger Nate April 08, 2013 10:11 AM  

"That's not how I understand it. The Banksters can't make enough rope fast enough. And what they do make, most people don't want any."

Then you're making Vox's mistake of misunderstanding the multitude of delivery systems available.

Blogger Nate April 08, 2013 10:13 AM  

"You're fundamentally misunderstanding. The infamous Ben Bernanke "helicopter" comments were intended to be humorous. VD is of course correct that even if they did something like that it wouldn't solve the problem they are facing"

No mate.

You're funadmentally misunderstanding hyper-inflation in general. Its not about solving a problem. its what happens when they employ a certain tactic to attempt to provide themselves with a parachute... and it gets insanely out of hand.

Anonymous John Regan April 08, 2013 10:15 AM  

One last point and I'm done for now.

When the fed engineered incredibly high interest rates in the late 70's and early 80's that was an attack on existing debt obligations. But the creditor class at that time was not so closely identified with the financial/political class. Indeed, it would be fair to say that the systemic "creditors" at that time were the private sector productive classes. So it was politically acceptable to annihilate the value of the obligations to them. And so it was done, and high interest rates were sought and achieved.

By contrast, the creditor class of today is closely identified with the financial/political class. It is politically unacceptable to annihilate the value of the obligations to them. Accordingly, a low interest rate environment will be maintained as long as feasible. And that is what is being done.

Blogger Nate April 08, 2013 10:17 AM  

"Because when you put $100 in the bank, the bank loans (say) $90 of it to someone else. He spends that money, and the people he purchased from put $90 in their bank. That bank loans (say) $81 of it to someone else, and the process repeats."

bzzzt

That's not how it works. You put $100 in the bank... and the Federal Reserve says... "Hey look... there is $100 dollars in that bank. Let's give them... ummm... $15,000 in credit to lend out. Because that's awesome."

The 100 dollars is not realated to the credit the Fed doles out. Its just ex-post-facto justification.

Anonymous RINO April 08, 2013 10:27 AM  

Everything has been going up, it seems, other than housing/real estate.

How much of that is from higher gas prices and/or supply/demand issues?

Anonymous Josh April 08, 2013 10:31 AM  

Nate, Vox, Keen, and Mish are correct. The reserves don't create the capacity to create loans, the loans create the need for reserves.

The problem is that, aside from federal student loans, people aren't borrowing as much.

You can't print new borrowers.

Blogger Conan the Cimmerian April 08, 2013 10:31 AM  

RINO,

Dunno.

How is that for a strong, educated answer.

Ha.

On the ground, things only seem to be going up.
And it seems more than the usual "adjustment for inflation" type.

anecdote != data

Anonymous Stilicho April 08, 2013 10:34 AM  

That's not how it works. You put $100 in the bank... and the Federal Reserve says... "Hey look... there is $100 dollars in that bank. Let's give them... ummm... $15,000 in credit to lend out. Because that's awesome."

The 100 dollars is not realated to the credit the Fed doles out. Its just ex-post-facto justification.


There's hope for you yet! You've made some valid points in the course of this debate, including re: the finalization of transactions. Now, think of all those credit based transactions as incomplete...but the completion is indefinitely delayed by the issuance of ever more credit. In such a system, when credit slows down, things get dicey. When it stops growing things get scary. When credit decreases, things get real. When credit deflation occurs, currency and checkbook money become relatively more valuable unless they have been increased to the level of the pre-deflation credit ($53 trillion here).

Anonymous VD April 08, 2013 10:40 AM  

I am not seeing modestly higher anything. It has been a fairly considerable up and up.

Compare it to the increase in the size of the bank reserves. We're not seeing anything like one would expect if it worked that way. Even with the federal government DOUBLING its debt in four years.

Anonymous zen0 April 08, 2013 10:43 AM  

@ John Regan

When the fed engineered incredibly high interest rates in the late 70's and early 80's that was an attack on existing debt obligations.

They said it was an attack on inflation, and it worked that way.

Anonymous zen0 April 08, 2013 10:50 AM  

@ Josh the loans create the need for reserves.

Basically the rationale behind the Basel III agreements. Increased reserves must be on hand to deal with the next financial crisis brought on by explosive decompression/ loans gone bad.

Anonymous Josh April 08, 2013 10:51 AM  

Raising rates in the late 70s/ early 80s was possibly the last time the Fed did anything right.

Anonymous Blkspn Vksklska April 08, 2013 10:56 AM  

@ Conan

It has been a fairly considerable up and up.

But is not hyper-inflation. Repuplica Srpska experience 63% daily inflation, 1964. Prices double every 1.4 days, yes?

Anonymous Roundtine April 08, 2013 10:57 AM  

Copper and other industrial commodities are down from their peaks, despite continued printing. Look at a chart of copper or base metals, it is back to the post 2009 money print rally. Everything went straight up for a few months after March 2009 and copper is back to that level. If it keeps falling it's going to head back to 2008 lows. The charts are saying we could be on the verge of an economic collapse.

Everything in the inflation argument (with regard to rising prices) hinges on Chinese demand, they are 1/3 or more of many major commodities and the marginal buyer of energy. China did a stimulus worth 40% of GDP in two years, and the CCP forced the banks to lend to.......CCP controlled companies. If China rebalances (switches from centrally planned infrastructure development to a consumer economy), all the commodities and energy prices are heading for 2008 lows.

Anonymous Josh April 08, 2013 10:59 AM  

But is not hyper-inflation. Repuplica Srpska experience 63% daily inflation, 1964. Prices double every 1.4 days, yes?

In Soviet economy, prices inflate you!

Anonymous Blkspn Vksklska April 08, 2013 10:59 AM  

oops. 1994. Is Englich, no Cyrillic.

Blogger IM2L844 April 08, 2013 11:10 AM  

I get the points that are agreed on. It's going to hell in a hand basket. But how can anyone make this apparent economic schizophrenia understandable to the layperson (me) when even those smart people well versed in the esoterica (you know who you are) can't agree. I guess I'll just keep trudging along until I get comfortable with choosing one side or the other.

Anonymous John Regan April 08, 2013 11:11 AM  

@zeno & Josh:

You are both missing the point. It may be economically sound practice for the fed to engineer high interest rates to tame inflation, and that may be their stated, and even real intention.

But ultimately the decision to do so is grounded in a political consideration: the people who are hurt by it are politically weak.

In the same way, the decision not to engineer higher interest rates at present is grounded in a political consideration: the people who would be hurt by it are politically powerful.

Here the stated reason is more transparent: they can say that they're encouraging borrowing by making borrowing "cheap", but it only looks cheap when interest rates will be higher down the road. And for years now, the fed has indicated that it will keep interest rates low for as far as the eye can see.

The Fed's actions are best understood as politically driven, not economics driven. That is the point. Discussions of Z1, MZM, M2, etc. are largely irrelevant.

Blogger Conan the Cimmerian April 08, 2013 11:13 AM  

VD: Even with the federal government DOUBLING its debt in four years.

Blkspn Vksklska: But is not hyper-inflation. Repuplica Srpska experience 63% daily inflation, 1964. Prices double every 1.4 days, yes?

When put into perspective, yes, I have to agree.

Anonymous MendoScot April 08, 2013 11:43 AM  

Nate's tangent into malinvestment isn't completely irrelevant...

But surely you don't consider strippers, orgies, cocaine and boob jobs to be malinvestment? Preposterous!

Blogger IM2L844 April 08, 2013 11:49 AM  

The Fed's actions are best understood as politically driven, not economics driven.

When I think of the global economic situation in terms of an agenda driven long term strategy, it makes more sense to me. It's very difficult for me to buy into the idea that it could simply be the culmination of a series of purely accidental clusterf***s.

Blogger Cogitans Iuvenis April 08, 2013 11:52 AM  

If China rebalances (switches from centrally planned infrastructure development to a consumer economy), all the commodities and energy prices are heading for 2008 lows.

That is what the PRC leadership has been trying, and failing to do, for a couple of years now. There are a lot of reasons why they ultimately will fail, but suffice it to say the most pertinent is that they are engaging in central planning, and central planning always fails.

Anonymous zen0 April 08, 2013 12:02 PM  

@ John Regan

The Fed's actions are best understood as politically driven, not economics driven.

Certainly a point to consider.

Anonymous Van April 08, 2013 12:11 PM  

I wouldn't say long term agenda and multiple clusterf#cks are mutually exclusive. There may have been a long term agenda, and it may have been intended to bring about an NWO and enslave the masses, but things seem to now be spiraling out of control due to the side effects/unintended consequences of the various steps in the plan. TPTB simply can't control all the variables and couldn' predict the outcomes.

This isn't Cloward-Piven successfully implemented, it's C-P attempted with a total loss of control (assuming, for the sake of argument, C-P was the strategy). Don't get me wrong, they may be adapting on the fly to Plan B (or C, D, E, etc.) And could still pull it off.

Anonymous E. PERLINE April 08, 2013 12:13 PM  

Inflation is unequal. The dollar in Europe is supposed to be desirable, but for buying European goods it's treated like trash. I watch a TV show about Americans buying homes in Europe and they pay many dollars for a ruin that needs outright razing, rather than re-selling.

I hesitate to suggest that this may apply to at least 80% of all of Europe.

Anonymous JartStar April 08, 2013 12:29 PM  

On a more positive, but OT note gun manufactures are moving to Texas thanks to the idiots up north.

Anonymous zen0 April 08, 2013 12:32 PM  

Van warns:

There may have been a long term agenda, and it may have been intended to bring about an NWO and enslave the masses, but things seem to now be spiraling out of control due to the side effects/unintended consequences of the various steps in the plan.

Kyle Bass concurs:

When the Central Banks begin to distrust each other, the global What is perhaps even more concerning, he adds, "you are starting to see the central banks not trust each other." At a certain point in time, "nationalist interest takes over the global [G7] kumbaya," and that is occurring now.

http://www.zerohedge.com/news/2013-04-07/kyle-bass-japanese-retirees-will-lose-half-their-life-savings

Blogger Nate April 08, 2013 12:53 PM  

"VD: Even with the federal government DOUBLING its debt in four years."


Its almost like you guys don't realize how the hyperinflation is going to happen.

Anonymous John Regan April 08, 2013 12:56 PM  

@Nate: Please hold forth. Tell us how it is going to happen.

Blogger Nate April 08, 2013 12:59 PM  

"The Fed's actions are best understood as politically driven, not economics driven.

Certainly a point to consider."

No.

The feds actions are taken to protect those that own the fed. It is a lap dog. The people nominally holding power in various political offices are almost always irrelevant.

The exception was Clinton... which was evident when he sat down with Greenspan and explained that if the rates were raised... then Alan would be a suicide victim... and be found face down in a DC park.

Blogger Nate April 08, 2013 1:04 PM  

"@Nate: Please hold forth. Tell us how it is going to happen."

Indeed. In the next post on this topic.. I'll tell you how it can happen. There is actually more than one mechanism for it.

I'm just stunned that after everything I've said you can't see exactly where I am going.

Blogger Positive Dennis April 08, 2013 1:14 PM  

Even modest inflation is bad for business. The way accounting works in Europe, and may soon work here, hyperinflation would bankrupt every business in the US. Modest inflation dramatically increases the taxes paid. I blog about this today.

http://www.prophecypodcast.com/journal/2013/4/8/lifo-vs-fifo.html

Anonymous John Regan April 08, 2013 1:20 PM  

@Nate: Are you suggesting that Bill Clinton was standing up for the little guy/politically powerless against the power of Greenspan and the banksters to keep rates low?

I'd be pretty surprised by that suggestion, but you seem to be going there. Let's delve into that while we await your next post telling us how hyperinflation is just around the corner.

Blogger Nate April 08, 2013 1:24 PM  

"@Nate: Are you suggesting that Bill Clinton was standing up for the little guy/politically powerless against the power of Greenspan and the banksters to keep rates low?"

No. I'm saying Clinton wanted the interest rate low to keep the inflation going so it would maintain the appearance of a good economy while he held office.

Dude ran up the credit card to make it appear that everything was better than it was... and you people are falling for it.

Blogger Nate April 08, 2013 1:26 PM  

"Let's delve into that while we await your next post telling us how hyperinflation is just around the corner."

Who said anything about right around the corner?

Its sometime in 2015. Give or take a few months.

Blogger Nate April 08, 2013 1:35 PM  

Low interest rates are bad for the little man John. That's what you're missing. The little man can't save... he gets no return on his savings.

Anonymous Stilicho April 08, 2013 1:41 PM  

Savings are just another barbarous relic...

Anonymous joe doakes April 08, 2013 2:03 PM  

It sounds as if both Vox and Nate are heading for the Morman solution - take your money out of the bank now and stockpile a year's worth of food and supplies for the coming crash - with the twist that Nate's solution also includes a line intem for bourbon.

Will you two post shopping lists at the end of this exchange?

Anonymous John Regan April 08, 2013 2:16 PM  

@Nate: Low interest rates might be bad for the little man, might not be. Depends. Bad for debtors who are tapped out, though. That's for sure.

Blogger Nate April 08, 2013 2:21 PM  

" Low interest rates might be bad for the little man, might not be. Depends. Bad for debtors who are tapped out, though. That's for sure."

Dude.

You don't know enough about this to have an opinion.

Artificially low interest rates are bad. Period.

Anonymous John Regan April 08, 2013 2:29 PM  

@Nate: Well, check with Michael Hudson about that. It really depends. Unless by adding the word "artificially" you have constructed a tautology.

Low interest rates are not bad for people holding existing debt, because it helps preserve the value of the debt which is, of course, held by the creditor as an asset. Same principle by which an increase in interest rates is bad for the value of bonds.

You have to think this through.

Anonymous Lulabelle April 08, 2013 2:56 PM  

"On a more positive, but OT note gun manufactures are moving to Texas thanks to the idiots up north. "

And we say "Welcome"!!......now, we need some ammo manufacturers.

Blogger JartStar April 08, 2013 3:09 PM  

It is interesting that there's now a coordinated effort by Western governments to spread FUD about offshore accounts while at the same time trying to get the names of everyone who has money offshore under the guise of criminal investigations. Since only the wealthy put money offshore, and the narrative is that they are doing it to avoid "paying their fair share" and for criminal activities they are setting up the general public to accept offshore confiscations.

"Once your investment ends up in a place that bills itself as a secrecy haven, your money is offshore and you have no legal standing to go get it," said David L. Peavler, an associate regional SEC director in Texas who worked on the case. "You're basically putting your faith in another country's process and there's a high degree of risk. You have to ask yourself, why in the world would you send your money there?"

The government just said loud and clear that when they come for the money you are legally out of luck.

Blogger IM2L844 April 08, 2013 3:36 PM  

This isn't Cloward-Piven successfully implemented, it's C-P attempted with a total loss of control

Okay, I had to look up Cloward-Piven strategy, but what little I read doesn't look like the same long term objective I had in mind. It looks to me like step one is to convince everyone that capitalism just doesn't work. If that's the case then it's not out of control at all, but right on track.

Blogger JartStar April 08, 2013 4:04 PM  

And we say "Welcome"!!......now, we need some ammo manufacturers.

No kidding. Makes me wish I had a 30-30 or a 7mag for my rifle because that's all that's on the shelves. Fortunately .357mag and .38sp +p is still around occasionally. I haven't seen any .40 in months and months.

Anonymous Anonagain April 08, 2013 4:06 PM  

And we say "Welcome"!!......now, we need some ammo manufacturers.

How much would it take to start up an ammo manufacturing company? I'm thinking there's a market for it, for even a small company. There's lead, casing, gun power. Put it all together. I mean, how hard could it be to start production?

If the problem is the unavailability of raw materials, that's that, but if it's just a matter of production unable to keep up with demand, then what's stopping others from jumping into the business? We're not talking automobiles here.

Anonymous Van April 08, 2013 4:09 PM  

Cloward-Piven or other nefarious plan, things seem to be falling apart. It does present an opportunity to blame capitalism (the average person not realizing that our tax code alone has been enough to prevent us from actually engaging in capitalism for decades).

I can go along with certain conspiracy ideas, but not the sort of "grand design" idea of our economy being rigged over a decades long plan to slowly get to this point. If I believed that, I'd have to concede that a large scale economy could also be controlled for the purpose of long term stability, which would cause me to cease being a capitalist and become a subscriber to central planning.

Anonymous Josh April 08, 2013 4:19 PM  

then what's stopping others from jumping into the business? 

I suspect that there is all sorts of regulatory hell involved in starting a company manufacturing firearms or ammunition. Regulatory hell orders of magnitude greater than with other industries.

Anonymous Van April 08, 2013 4:19 PM  

Although I suppose it's a lot easier to muck up an economy that control it for stability. You might not need to know they exact nature of the problems you'll cause, as long as you cause problems and convince the rubes the solution is for them to give you more power.

Anonymous Van April 08, 2013 4:22 PM  

Environmental impact statements, probably significant EPA oversight, insurance would be higher than average. Possibly federal, state, and local licensing issues.

Anonymous Anonagain April 08, 2013 4:31 PM  

Now see, this is where NAFTA would come in handy. Set up shop in Mexico, sell online to US. Free trade, baby. Balas Buenas hecho en Mexico.

Anonymous Josh April 08, 2013 4:49 PM  

Hell, if we set up shop in Mexico, we could get the department of justice to give us start up capital, since they're so determined to arm the narcos.

Blogger IM2L844 April 08, 2013 5:16 PM  

If I believed that, I'd have to concede that a large scale economy could also be controlled for the purpose of long term stability

Imagine central planning with abolute control over the distribution of resources and raw materials and everybody on board for a predictable algorithmic based Bitcoin-esque global currency. If they were selling it hard with the promise of stability being sung from the halls of the ivory towers, a desperate population would willingly climb over the top of one another to jump on that bandwagon.

There isn't some big secret conspiracy. Global central governance has been proposed and openly discussed on the world stage for decades by some of the richest and most influential people on the planet. There are millions of useful idiots with purely altruistic intentions that believe a scenario like this is truly the only hope for humanity. They just need a way to get everybody lathered up and rooting for it. Most of them are not evil at all. They're just wrong.

Blogger Nate April 08, 2013 5:21 PM  

"Low interest rates are not bad for people holding existing debt, because it helps preserve the value of the debt which is, of course, held by the creditor as an asset. Same principle by which an increase in interest rates is bad for the value of bonds.

You have to think this through."

No Nancy.

You need to try to actually follow along in the debate. If you were... you would already know why you're wrong.

Blogger tz April 08, 2013 7:04 PM  

@Nate:

That's not how it works. You put $100 in the bank... and the Federal Reserve says... "Hey look... there is $100 dollars in that bank. Let's give them... ummm... $15,000 in credit to lend out. Because that's awesome."

The 100 dollars is not realated to the credit the Fed doles out. Its just ex-post-facto justification.


So a new bank opens, and 100 people each put $100 into the bank. What happens one month later when the same 100 people all want to take their $100 back, either in cash or by check?

Or as Vox put it, Is the $100 held by them as a trustee, where it is your property, or do you just have an IOU for $100 whose seniority is currently very high (with the FDIC backstop), but that can be changed at any time?

If in the case of rangnarockfinancial, they "print", i.e. link the FDIC with the FED and give out FedExcess no-limit cards to all the depositors, we get hyperinflation. If it all goes poof, then physical federal reserve notes might increase in value.

There is a big problem with our economy. Most of it is virtual. How much exchange would take place if plastic didn't work (not that there was no credit, but you would have to go into a bank or ATM to get physical money to pay, say if hackers managed to lock out the visa/MC/Amex/Disc networks for a few days or weeks). That would not change the AMOUNT of money in the system but would impact the VELOCITY. (Even now they want to put unemployment or other things on high-fee debit cards).

Were I to want to try to head this off, I would create or buy-mod a cell phone operator. You have most of the authentication and security of cards (if they e-lock it with wipe). Then link it with what might be described as a bitcoin 2.0 maybe with commodity linkage or something else that would store value. Your phone number is your account number. Transfers would be easy and short of shutting down the cell SMS and the rest, a Cypress could NOT happen (think of the demand that RIM/Blackberry do Key Escrow). Non-fractional reserve, lets you store value (charges nominal but profitable fees), and is part of the communication instead of the financial infrastructure.

You would merely need something which would provide exchange and would be trusted because it is outside of the system that has blown up. Gold and silver might be part of the answer, but no vending machines could use them, they could use NFC or dial-a-dessert.


"elite panic": http://bombsite.com/issues/109/articles/3327

Blogger tz April 08, 2013 7:11 PM  

There are four quadrants. The axes are (real, inflation adjusted) interest rates - low to high, and default rates - low to high.

We are in the unstable quadrant of high-default, low-interest.

As in an earlier post, I noted if you put in a pile of 1000 $1 bills, two bad results are to get back less than 1000 of the same value, or to get $1000 which can only buy 1/10th of what $1 could when you "loaned" it to the institution.

The low interest rates help banks - 0.1% borrow, 4-5% loan is 40-50x and would be considered usury if we remembered that term (I haven't linked this yet to the feminazition of churches, but it is probably connected in some way). If banks borrowed at 5% and loaned at 10% it would be less profitable.

Anonymous Boetain April 08, 2013 7:55 PM  

Vox and Nate (and some of the ilk for that matter) have done an excellent job outlining how the current system works and the instability that is present. Still, the matter of future deflation vs. inflation comes down to a guess as to how TPTB will behave. Vox seems to think that the players will stay within the current framework and not be able to issue enough credit to stave off deflation. Nate seems to think that TPTB will move on to other measures to keep the inflation scenario going. I tend to agree with Nate, but it is all guesswork.

The best thing is to stay diversified within the financial systems, various account types, and also with a good dosage of physical metal, ammo, cash, etc.

Everybody talks about the horror of Cyprus. But from what I can tell, only those people with balances in the uninsured range took a haircut. Why the hell, for example, would you have an account in a US bank with the balance above the FDIC limit ($250K). Well, that's what these people did in Cyprus with the large accounts. It was a calculated risk, and they crapped out. Stay diversified, keep your bets small and spread them around.

Anonymous p-dawg April 08, 2013 10:06 PM  

I am converting cash to goods as fast as I get it because my cash is worth less today than it was yesterday. If my cash were gaining greater value, I would be converting goods to cash instead. Thus my actions appear to me to indicate inflation, not deflation.

Anonymous Anonymous April 08, 2013 10:41 PM  

Here's the problem..both Nate and Vox are arguing the finer points based on theory, while ignoring the factor that explains why we are not seeing what really should be a highly inflationary economy.

I believe it was Vox who touched on it by claiming that the amount of money being created must equal or exceed the value being lost in the credit contraction. He is absolutely right, which would seem to support his argument regarding this being a deflationary economy.

On the other hand, as Nate seems to be arguing, the proof is in the pudding. With the massive increase in money supply via "quantitive easing", and the obvious increase in retail prices in virtually every sector he certainly has a point regarding this being an inflationary economy.

It's all about the banks, the big guys, and defining the situation. The "leadership" made the decision to save themselves, and the big guys, while leaving the little guys to fend for themselves. Think of the banks as money dams whose reservoirs are soaking up the newly created money. Those up river are doing quite well as they enjoy all the amenities associated with their cabins on the lake. Down river it's a bit of a different story as the citizenry fight over the little water that leaks over the top of the dam. The prices of all the necessities begin to skyrocket, while the prices of assets fall as the poor unfortunate souls down river sell everything just to survive.

The question is...will the dam break first....touching off hyper inflation....or will the dam hold.....enriching those above the dam at the expense of those below it as those with access to money buy the assets of those without at fire sale prices?

Inflation or Deflation? It all depends on where you sit, and when you ask the question..

AaronInvestigates

Anonymous Toby Temple April 08, 2013 11:12 PM  

when I pull money out of the bank, Nate says that's a sign of inflation

should have read that again...

Anonymous map April 09, 2013 3:27 AM  

I don't understand how this discussion could exist without an understanding of what wages are doing. Nominal increases in the price value could indicate a devalued currency or it could indicate increases in demand.

What is needed is a measure of what is happening to nominal wages. If they are rising as fast or faster than prices, then you have a deflationary event. If they are rising slower or slowest compared to prices, then you have inflation.

Vox is right that you would have inflationa and deflation depending on what you are buying. Even then, the government my be involved in creating a sticky price that would otherwise not exist.

Anonymous David of One April 10, 2013 12:31 AM  

"... deposits are legally defined as debts owed by the bank to the depositor and therefore qualify as credit money even before they are subsequently loaned out ..." - Vox

As has become all to common for me as of late, there are good number of things for which my contextual understanding was grossly incomplete. It is never comfortable confronting one's ignorance and in this case I am not certain that I am more free after the application of the truth.

Regardless, it is disturbing to realize that there are times in history ... even in the very brief present ... that "savings" are infinitely more secucre in under one's mattress or safey deposit box than they are in a "savings account".

The actual meaning and application of a "savings account" should be enough to shake one's confidence in our perception of reality.

The truth is far worse in realizing that a good number of us were bound & gagged even before the first childhood savings account deposit was made.

The crowning insult is that it is a system by which no shares are issued and house rules are applied without so much as a "chip".

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