Inflation, deflation, gold and currencies

[silver2008]

http://www.itulip.com/Select/feddeflationplaybook.pdf

The fed deflationary playbook?

[malleni]

http://www.itulip.com/Select/feddeflationplaybook.pdf

The fed deflationary playbook?

Thanks silver,
Very good link.

[theeconomy]

Dear John:
I enjoy your website and believe you are very well informed.
1- Kindly explain how we can have deflation if the Fed floods the banking system and the USA economy with unlimited cash. They will in effect be devaluing the dollar .This normally would cause hyper inflation...
2-What would you recommend a investor to do in order to survive, if the deflation scenario comes to pass and we go into a major depression. I am looking forward to your answer.
Thank you...

[mannfm11]

If I have $5 and I loan it to you, have I flooded the world with cash? If you used the $5 to buy a financial asset and you then presented it to me and I gave you another $5 did I flood the world with cash? If you might note, the t-bill rate on 90 day bills is about .2%. Do you know how it got to .2%? The cash is circling the block. Citi has a $400 billion fed funds liability the last time I looked. It could have been reduced significantly, but I would venture it is still there, which is why they are crying in their beer about failing to get WB for its deposits. Citi literally can't lend money right now. The Fed is lending to banks because the banks can't fulfill the liabilities they have already created. This seems to elude everyone that likes to dream that the Fed merely throws money in the streets. It has a stranglehold on the banks right now. It has all the assets a bank could sell to raise 2 cents in its possession. The rest of the banks assets are either in the process of crumbling or have already crumbled. I just read where for the 4th time, a German treasury auction has failed. How much inflation do you think we are going to get when one of the 4 or 5 richest countries in the world has auctions that are failing? Savings equals debt. The deposits in banks are someone's savings and they are also the liabilities of the banking system. The banking systems liabilities are the problem, not their assets. The assets are problems too, but they wouldn't be problems if the liabilities weren't present. The liabilities cannot be dealt with, as they are absolute. What the Fed is putting in is a liability, not an asset.

[mannfm11]

silver2008,what does figure 3 in that publication remind you of? It reminds me of 2003-2008 where we had low rates, a boost to inflation then a fall back to earth. I have been a constant deflationist for a long time, not because i believe in the value of paper itself, but the constraint of credit. The situation today isn't any different than 1930. It was credit, not gold that caused deflation then, excessive debt becoming unservicable. I do believe that had they had the GSE's we had, they would have not had a recession in 1929, but a stock bubble the size of the one we had in 2000 instead before it burst and the depression would have probably hit in 1940 instead of 1930. The 1990s was manufactured out of mortgage lending. The bubble was mortgage money that found its way to the stock market. The housing market went mania later as it took longer to get started and a sizable group of home investors washed out in the 1980's. Failed real estate investments are much rougher than failed stock investments in that you have to get rid of real estate or it eats your lunch. You can wait on a stock portfolio to come back. We won't have inflation until they figure out how to restore home equity. They will have pole vaults over the moon first.

[malleni]

mannfm11,

Thanks for explanation of your view.
Personally, I think that your explanation of figure 5 (from silver2008s publication) - would be appreciated too.

Best regards
malleni

[theeconomy]

The Bush administration is no longer going to be buying up toxic mortgage assets instead it will use the $700 billion financial bailout fund and will make a direct investments in banks .
http://www.reuters.com/article/ousiv/id ... P820081112
Therefore, the infusion of funds will not be a loan, but instead it will be a purchase of bank shares and the FED will be a partial owner of the banks.It will be an asset on the books of the banks and not a liability. The banks can in turn use this financial infusion to create large amounts of new money to lend to their customers ..It seems to me that this process will devalue the dollar and will contribute to inflation, not deflation. Thank you.

[theeconomy]

I understand your analysis that we have deflation and not inflation. ... Inasmuch as we are in a bear market in stocks,commodities including gold and real estate.Kindly let us know what action steps you recommend we should take to make money and preserve capital in this deflationary environment.Thank you.

[John]

> I enjoy your website and believe you are very well informed. 1-
> Kindly explain how we can have deflation if the Fed floods the
> banking system and the USA economy with unlimited cash. They will
> in effect be devaluing the dollar .This normally would cause
> hyper inflation...

I've written about this many times. See, for example:

** What's coming next: Understanding the deflationary spiral
** http://www.generationaldynamics.com/cgi ... 27#e081027

> 2-What would you recommend a investor to do in order to survive,
> if the deflation scenario comes to pass and we go into a major
> depression. I am looking forward to your answer. ...

> I understand your analysis that we have deflation and not
> inflation. ... Inasmuch as we are in a bear market in stocks,
> commodities including gold and real estate. Kindly let us know
> what action steps you recommend we should take to make money and
> preserve capital in this deflationary environment.Thank you.

Your highest priority should be to preserve capital, and not worry
about whether you can make a lot by putting money into some risky
investment. In this environment, the person who wins is the person
who loses the least. That means you should keep what you have in
cash.

If you listen to all this popular stuff on "capitulation," you'll be
screwed.

John

[sunay]

Hi everyone
My name is sunay, I live in Europe and I am very interested about the topics discussed here.
John you seem to blindly follow your "system" to predict catastrophies. Which means 2 things
1: Either you have tested it for years and you are very satisfied with the results
2: or you hate the world and you want everyone to live miserably the next few years.

I will go for the first meaning, because I find it more interesting and intellectually challenging.

I read somewhere that you expect the euro to implode. Many people expect that, but actually very few explain what will be left of Europe and the currency. Can you enlighten me? Which countries will benefit or be the biggest losers, what will happen to Germany and France the biggest economies, will that change anything for UK, the only big EUropean country outside of EMU?
The Sterling is in free fall against the Dollar and the Euro. I read the reasons you give for USD outperformance vs the rest of the world, except Yen (you can add the end of carry trades as another reason for Yen strengh), given that UK, Australia and New Zealand share the same symptoms than USA and for the same reasons, do you expect these countries' currency to outperform vs others?

Thank you again for your "out of the box" thinking.

Sunay