Financial topics

[Higgenbotham]

The US government and Fed have been trying to navigate a course of low positive inflation (inflation targeting) and at the same time keep money losing or inefficient mega corporations in business via bailouts. That's the best, but not necessarily quickest, way to permanently destroy an economy because it knocks out efficient producers while subsidizing inefficient producers. Deflation knocks out inefficient producers while hyperinflation would at least reset the playing field before the efficient producers hit the wall and get driven out of business. I'm seeing "on the ground" evidence this is what is happening now in the US economy. We'll know more in a few months, but Old did pick up on the Sears and K-Mart closings, which may not be the most efficient retailers but they aren't subsidized like Wal Mart is either.

[Trevor]

I've noticed that even if unemployment stays roughly steady, at least the official unemployment, the length of unemployment continues to climb. The average length in November 2011 was 41 weeks, higher than at any time since the 1930's. The only reason unemployment has even held steady is because people are giving up because there is not much to be found.

[John]

Some people fantasize that the girl of their dreams will magically
appear and come to save them. Other people fantasize that they'll win
the lottery, and that will save them. Still others fantasize that
hyperinflation will save them. There oughta be a name for those
fantasies.

[Trevor]

Some people fantasize that the girl of their dreams will magically
appear and come to save them. Other people fantasize that they'll win
the lottery, and that will save them. Still others fantasize that
hyperinflation will save them. There oughta be a name for those
fantasies.

Yeah, I wish i had those fantasies. i did for a little while, but over time, what optimism I had disappeared. Economically, what are you expecting for 2012?

[Higgenbotham]

Probably the best thing that can be seen for everyone is some sort of clear direction, whether it be inflation or deflation, an up stock market or a down stock market, and so on.

So imagine the Fed keeps trying to hold interest rates down and prints money like crazy. Then we have the hyperinflation positive feedback loop that will destroy the currency.

So if inflation becomes the clear trend I think things will fall apart fast.

I'd agree with that because the consumer can't afford much more inflation at this point, so a surge of inflation would cause things to fall apart faster.

[Trevor]

There was actually a slight amount of deflation in 2009 when it seemed like everything was falling apart. we still have inflation at the moment, although not nearly as much as many were expecting.

[Higgenbotham]

There was actually a slight amount of deflation in 2009 when it seemed like everything was falling apart. We still have inflation at the moment, although not nearly as much as many were expecting.

In 2009, the natural forces of the economy were trying to shed the inefficient producers but the US governmenet and Fed stepped in and stopped things from falling apart short term only to "kick the can". Now we still have the inefficent producers sucking up money as well as prices that are higher than what they should be or would be had the bailouts not taken place. When things start falling apart again, maybe soon, it should be a lot worse, perhaps so disorderly that things can't be set right in a generation.

[Trevor]

To the fury of many Americans; everyone I know is furious that we bailed out all the companies who were in distress, costing us several hundred billion dollars. Now some of them are asking for more bailout money and they're doing the same thing that got them into trouble in the first place. Apparently the lesson hasn't sunk in yet.

[John]

Vince and Higgie - I have a question.

You recently suggested that there might be deflation followed by
hyperinflation. What's the reasoning behind that suggestion? In
particular, once deflation was in force, why would there be
hyperinflation?

John

[Higgenbotham]

Vince and Higgie - I have a question.

You recently suggested that there might be deflation followed by
hyperinflation. What's the reasoning behind that suggestion? In
particular, once deflation was in force, why would there be
hyperinflation?

John

There could (probably will in my opinion) be too much disorder in the system to either have a true deflation or for the Fed to characterize the business climate and proper policy response. There may be a glut of goods at some point relative to the diminished supply of dollars but if the goods can't be moved through the system due to the bottlenecks created by QE2, then prices can't go down. However, when the Fed sees what they think is deflation they could (probably will in my opinion - if it happens before the election) reflexively overcompensate and create a glut of money that is useless and is immediately rejected by the marketplace. It'll be too difficult to predict. If the S&P goes to about 800 during the first half of the year, I will move to a 50/50 mix of assets (inflation/deflation) and forget about it.

In wave terms, it's my guess that the amplitude of the noise in the system could grow to several times the amplitude of the trend, so there really won't be a trend, just a lot of disorder until the system collapses. As I've been saying, the system is already getting noisy and trendless.