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Dear Vince,

vincecate wrote: > What about the US Revolutionary war crisis hyperinflation? What
> about the US Civil War hyperinflation? What about the inflation
> after getting off the gold standard in Great Depression? And if
> they had not outlawed gold ownership the paper money would have
> failed, making hyperinflation then too.

I should have partially qualified my statement with respect to crisis
wars.

vincecate wrote: > You note that if people spend more on food and energy they spend
> less on other things as if this balances out the price
> level. However, if people spend a larger and larger fraction of
> their income on food and energy then a fair CPI would weight these
> more and more and other stuff less and less. So it does not really
> balance out. This effect will get more extreme as higher fractions
> of income are needed just for food and energy. In the extreme if
> people spend all their money on food and energy then the prices of
> nothing else should really be in the CPI. Then the food&energy
> inflation rate would be the CPI inflation rate.

This makes no sense at all. If food prices go up one year, but the
the next year food prices fall and clothing prices rise, your logic
would count only the food prices in the first year, and only the
clothing prices in the second year. If you only count the items whose
prices are increasing, then you always have hyperinflation. If CPI is
to make any sense at all, then it has to measure prices for the same
basket of goods every year.

John

The dollar's value is effectively set by the cost of petroleum, which is set by expectations of supply/demand in the oil market. As oil exporting countries devolve into chaos, armed conflict and civil war and as demand continues to increase while this administration dithers about expanding domestic production (and alienates our historical allies in OPEC), fuel markets go long, oil's price rises and the dollar decreases in value. The last time this happened the Bush Administration cajoled OPEC into opening the pumps a little which brought the price back down (which doesn't appear to be an option considering Obama's handling of Egypt which infuriated and alienated the Saudi's among others).

As to food, John points out that demand is rising each day b/c of increasing world population; inaddition, almost every phase of the large scale food production depends directly on oil. Thus as oil prices rise food prices rise as well, the markets go loooong food.

A confounding factor is of course fed QE, the recipients were supposed to lend and invest the money in ways that spur economic growth, but instead they've socked it into the stock market and commodities, like oil (and precious metals) causing the bubbles in oil, precious metals, stock market, and food. The biggest, quickest with the most connections will become richer everyone else will lose EVERYTHING.

QE2 comes to an end in June, unless they start QE3, by this time next year we should be able to get a realistic handle on the whole situation. If they do start QE3, it might hold the prices at current levels. QE1 and QE2 didn't work; so there is no political will for QE3. After the unfathomable stupidity of Obamacare I wouldn't put anything past them, but whoever suggests it much less tries it will be politically DEAD along with their party for at least a generation.

(Another confounding factor is the looming implosion of the EURO, causing money to pour into stocks and commodities.)

[Tom Acre]

heavyrail wrote:MV=PQ, Economics 101. They don't even bother to print the money anymore, its just accounting entries on the books of the Federal Reserve and the "recipient." Once the banks and others start releasing the cash they are hoarding, the "V" or velocity varible in the equation will kick-in and guess what?..."Q" or quantity is not going to increase proportionally,...as fearless leader said "...prices will necessarily skyrocket."

I know this is a very simplistic view of the world, but I would like some one to show me an equation that explains the deflationary scenario,...where and how will the wealth flow? Will anything retain value or, will it all be relative? If everything is in a bubble and its all relative, why is gold in a bubble? If not, how will the differential adjustments in wealth take place?

What a philosophically theoretical mess. This is why someone who is as completely screwed up as Paul Krugman is can win the Nobel Prize.

I too would love to see the math for deflation with this formula. I don't have it. However I do have math using that formula for hyperinflation and it makes sense to me.

http://pair.offshore.ai/38yearcycle/#hyperinflationmath
http://www.sjsu.edu/faculty/watkins/infldynamic.htm

John wrote:So you can't have a generational financial crisis that leads to inflation.

What about the US Revolutionary war crisis hyperinflation?
What about the US Civil War hyperinflation?
What about the inflation after getting off the gold standard in Great Depression? And if they had not outlawed gold ownership the paper money would have failed, making hyperinflation then too.

You note that if people spend more on food and energy they spend less on other things as if this balances out the price level. However, if people spend a larger and larger fraction of their income on food and energy then a fair CPI would weight these more and more and other stuff less and less. So it does not really balance out. This effect will get more extreme as higher fractions of income are needed just for food and energy. In the extreme if people spend all their money on food and energy then the prices of nothing else should really be in the CPI. Then the food&energy inflation rate would be the CPI inflation rate.

Another way to look at it is that as food and energy go up it is not possible for optional goods to drop as fast and keep the average price level the same. The people producing the optional goods need energy and food which is going up in price. So what happens is businesses making things that are no longer in demand can not cut their costs enough to get goods sold at a profit and will be shutting down. As these other parts of the economy shut down, food and energy will be a larger fraction of the overall purchases in the economy. So average prices will be going up.

Another way to look at it. Imagine that everything Americans buy is imported from other countries. As food and energy prices go up they buy less of the other stuff. So food and energy are a larger fraction of total purchases and have more impact on the overall cost of living.

MV=PQ, Economics 101. They don't even bother to print the money anymore, its just accounting entries on the books of the Federal Reserve and the "recipient." Once the banks and others start releasing the cash they are hoarding, the "V" or velocity varible in the equation will kick-in and guess what?..."Q" or quantity is not going to increase proportionally,...as fearless leader said "...prices will necessarily skyrocket."

I know this is a very simplistic view of the world, but I would like some one to show me an equation that explains the deflationary scenario,...where and how will the wealth flow? Will anything retain value or, will it all be relative? If everything is in a bubble and its all relative, why is gold in a bubble? If not, how will the differential adjustments in wealth take place?

What a philosophically theoretical mess. This is why someone who is as completely screwed up as Paul Krugman is can win the Nobel Prize.

Guest wrote:There are very few uses for which gold is necessary.
[...]
To top it all supply (through mining/production) could easily be increased.
[Tom Acre]

Mining production can increase the total above ground gold by about 1% per year. Regular paper money has no limit to how much it can be increased per year. Gold and silver are the only money safe from the printing press. The world needs safe money. The market forces mean gold and silver do well when government paper money is no good.

If you evaluate gold and silver as just commodities, and not as money, you are missing a key part of the puzzle and will not be able to understand what is really going on.

There are very few uses for which gold is necessary. Its like ivory, other substances have been found/devised which are better and easier for almost every purpose.

Of total mined, processed gold:
More than half is in jewelery
About one fifth is in central banks
About half of the remainder (15%) is in industrial supplies and products of various types
That leaves only 15% of which only a very small amount (2-5%) is held physically by individuals.
Gold is currently in a bubble.
Additionally, if you buy shares from an ETF for IRA etc, considering the rate of fraud, you'd be lucky if it was backed by half as much as is contracted.

To top it all supply (through mining/production) could easily be increased. Like diamonds. companies control mining rates to regulate the supply and price.

[Tom Acre]

John wrote:Everything is in a bubble. Stocks have had historically high valuations since 1995. Real estate has been in a bubble internationally since 1995, and has only partially recovered. Gold's long-trend trend value is about $500/oz, but now it's in a bubble at three times its trend value.

John, you just don't understand the problem of inflation. Let's do a reductio ad absurdum on your logic to make it clear. From 1781 to 1971 (like 190 years) the price of gold went from $20/oz to $35/oz. By your logic the gold prices in the last 30 years are just a bubble. By your logic the price of gold has to go below $35/oz for long enough to compensate for these recent high prices so as to bring the average back down to its long term trend of around $35. This is absurd.

They are making over $1 trillion new dollars every year now and in $1971 it was more like $10 billion new dollars per year. Look at the Nixon Shock:

"Switzerland redeemed $50 million of paper for gold in July.[1] France, in particular, repeatedly made aggressive demands, and acquired $191 million in gold, further depleting the gold reserves of the U.S."

This a big international problem over like $241 million. Not billion. Not trillion. We have several orders of magnitude more money today. It is absurd to think we should have the price level of 30 years ago, like $35/oz gold. It will soon be as absurd to think of gold ever going back down to $1000/oz. The value of paper money is not constant, and you just don't get this.

http://en.wikipedia.org/wiki/Nixon_Shock

Your logic fails because when they are making lots of new money (on computers or printing on paper) the value of the money goes down, so it looks like everything is in a bubble. But really the value of money is going down.

It has been dry down here, but it is hardly ever dry enough to kill wheat. I don't believe they grow much wheat around Midland. You might note the picture of the lake. Those trees are that far out of water. Note the green shoreline. The mud marks the normal edge of the lake. Water level down a few feet is all. Wheat looks good here. Hasn't rained until this week pretty much since Feb 10.

I am still in the deflation group, but the idiots running the country could get me out of it. There are those that say the US couldn't default. This is probably true, but it would have to take the attitude it had no intention of paying its bills to take the path these people advocate. There could be a refusal to take dollars in foreign exchange if this attitude prevailed.

But, the value of the dollar come in its use for payment of debt. The banking systems of the world need dollars to service many trillions in debts. Also, all the speculative money out there is tied in some way to debt. I would say that people have no idea how fast commodities drop, but we saw it in 2008. Despite the amazing 2 year rally, the CRB still hasn't recaptured the decline that took about 4 months in 08. We aren't far away from another crunch. The general populace of the world isn't to hip on another bank bailout.

25-Apr-11 News -- Skyrocketing food and fuel prices spur inflation fears

The inflation versus deflation debate

** 25-Apr-11 News -- Skyrocketing food and fuel prices spur inflation fears
** http://www.generationaldynamics.com/cgi ... b#e110425b


** 25-Apr-11 World View -- Northern Ireland Bombmaking
** http://www.generationaldynamics.com/cgi ... 25#e110425


Contents:
"Skyrocketing food and fuel prices spur inflation fears"
"Inflation versus Deflation"
"The other side of the 1970s"

### World View - Northern Ireland Bombmaking
"N. Ireland security forces find caches of bombmaking equipment"
"Sen. Lindsey Graham recommends strong U.S. military action in Libya"
"Syria's anti-government uprising creates dilemma for Iran"
"Iraqi Shia want Saudis to withdraw from Bahrain"
"Imran Khan urges Pakistan to deal openly with US drone strikes"
"Cambodia and Thailand renew border clashes"
"Turkey's citizens increasingly commemorate Armenian massacre"
"King of Bahrain declines to attend Royal Wedding"