Inflation, deflation, gold and currencies

[Higgenbotham]

Hyperinflation is really about government debt, deficit, and how they have to print money like crazy if people stop rolling over government bonds and just take their cash when bonds come due. So the thing I think will really signal it is when private bond holdings start to drop (the more the Fed owns the more money they have printed). I have URLs for foreign Treasury holdings, Fed holdings, and SOMA activities, but would also like to have just total private Treasury holdings. Do you have a good URL that?

I mentioned something called the Flow of Funds Report once in reference to who owns Treasuries. That report should list all the owners of treasuries and how much they own.

[richard5za]

Found this on Jesse's Cafe Americain website (with thanks Jesse) and have reproduced it here firstly because I agree with Robert Mundell's views and secondly because it illustrates that the path forward is not at all clear; well, not to me anyway.
Richard

"When the international monetary system was linked to gold, the latter managed the interdependence of the currency system, established an anchor for fixed exchange rates and stabilized inflation. When the gold standard broke down, these valuable functions were no longer performed and the world moved into a regime of permanent inflation.

What will be the character of the international monetary system in the next century and how will gold intersect with it? This subject may strike modern audiences as a strange topic, but back in the 1960s, when people were deliberating about the future of the international monetary system, gold figured importantly in the discussions.

Even today, the importance of gold in the international monetary system is reflected in the fact that it is today the only commodity held as reserve by the monetary authorities, and it constitutes the largest component after dollars in the total reserves of the international monetary system."

Robert A. Mundell, Nobel Prize in Economics 1999

[vincecate]

There is now talk of a "sterilized QE3". I have made a post on my blog to try to work through what all this means.

http://howfiatdies.blogspot.com/2012/03 ... bonds.html

[John]

I suppose I should comment on this hyperinflationary orgy the last few
weeks from my friends who appear to believe that history always begins
this morning. You look at some tiny uptick in food prices or wages
and you act just like the mainstream media when they see a small
uptick in housing prices and declare that housing has bottomed out.
You have to look at the long-term trend as I've said many times, and
the long-term trend indicates a deflationary spiral.

And Richard, the Zimbabwe experience occurred during a generational
Awakening era (like America's hyperinflation from 1977-80) and during
a worldwide real estate and credit bubble, so it bears no resemblance
to what's happening today. And nobody has yet provided examples of
hyperinflation in any major country during the 1930s, which is the
most relevant era to compare to today.

John

[vincecate]

I And nobody has yet provided examples of
hyperinflation in any major country during the 1930s, which is the
most relevant era to compare to today.

In 1930 all major countries were sort of on a gold standard (really $2.50 in paper money for every $1.00 in gold for US). Nobody close to on a gold standard gets hyperinflation. If they are close and then people change to real gold coins they can get deflation for prices measured in gold coins.

Nobody has provided any substantial deflation example under a pure fiat currency (like 20% drop in CPI). Prices measured in gold coins have been having deflation already. But nobody is close to a gold standard now.

John, you are calling for 20% drop in CPI. When the things that people buy everyday are going up at 8% per year (as reported in the Everyday Price Index) it looks like you are off. The deflation was only the first 3 years of the Great Depression. We are past 3 years in this one.

[Higgenbotham]

You have to look at the long-term trend as I've said many times, and
the long-term trend indicates a deflationary spiral.

The long term trend could have been a positive one of deflation, but (name withheld) has been allowed to choose the long term trend of destruction. (name withheld) has destroyed the world monetary system (as the rest of the world Central Bankers followed and basically nailed the coffin shut over the past few months) and the dollar will not be permanently resurrected through any means - not now, not ever. As it breathes its dying gasps over the next few years, this is my previous recent summary of what will happen:

I think that's to be expected as the transition from quasi-deflation to inflation to hyperinflation takes place. The transition may take longer than we expect. Also, these are just words really. The idea is that the world currency system is being systematically destroyed and the destruction is accelerating beyond the point where it can be reversed.

I would expect one more round of quasi-deflation before the world monetary system is completely destroyed.

[vincecate]

The idea is that the world currency system is being systematically destroyed and the destruction is accelerating beyond the point where it can be reversed.

I would not use the word "systematically". I don't think Bernanke or anyone else is trying to destroy the currency. I would go so far as to say that in over 100+ cases of hyperinflation you will not find a single one where they wanted or planned to have hyperinflation. I think you have smart central bankers who think they can control the markets and make them do what they want. But in the end things get out of control and no matter how smart they are they can't hold things together.

[Higgenbotham]

When the things that people buy everyday are going up at 8% per year (as reported in the Everyday Price Index) it looks like you are off. The deflation was only the first 3 years of the Great Depression. We are past 3 years in this one.

I'm not sure inflation is 8%, but inflation is moving into non exchange traded items, wages, and rents - in other words, it is being "built in" to the economy rather than "bubbled in" like it was last year. That's different and it will be difficult to eradicate- even with another round of quasi-deflation.

While the 1930s are still somewhat relevant in my opinion, the most relevant comparisons would be the time periods before Europe slid into the Dark Ages.

[John]

> While the 1930s are still somewhat relevant in my opinion, the
> most relevant comparisons would be the time periods before Europe
> slid into the Dark Ages.

So, what happened during GENERATIONAL CRISIS ERAS in the time periods
before Europe slid into the dark ages? Do you have any historical data?

John

[Higgenbotham]

The idea is that the world currency system is being systematically destroyed and the destruction is accelerating beyond the point where it can be reversed.

I would not use the word "systematically". I don't think Bernanke or anyone else is trying to destroy the currency. I would go so far as to say that in over 100+ cases of hyperinflation you will not find a single one where they wanted or planned to have hyperinflation. I think you have smart central bankers who think they can control the markets and make them do what they want. But in the end things get out of control and no matter how smart they are they can't hold things together.

Systematically in the sense I am using it means that the responses are rote and predictable, as in "see signs of economy slowing" = "print money" or "see signs of default" = "print money", rather than "see signs of economy slowing" = "let the economy heal itself" or "see signs of default" = "use the bankruptcy procedures" that have been in place and served to build Western civilization for 5 centuries.