Inflation, deflation, gold and currencies

[vincecate]

The BPI is generated in real time from online data. It seems reasonable that it would lead the CPI, and looking at the history it seems to. Recently it has been going up fast and the latest CPI data is now going up fast too. The CPI is up about 1% in one month (equal to almost a 13% annual rate). I count hyperinflation as 5% per month or 80% per year. So by my count we are about 20% of the way to hyperinflation. 1/2 In fairness the BPI seems to have slowed down to like 1/2% this last month. So maybe we are not heading into hyperinflation just yet.

http://bpp.mit.edu/daily-price-indexes/?country=USA

[vincecate]

Gonzalo Lira has a good article on why we are doomed to inflation:

http://gonzalolira.blogspot.com/2011/04 ... asury.html

PS Anyone who really understands what hyperinflation of the global reserve currency will mean would call it a nightmare not a fantasy.

[richard5za]

I would like to share my thinking on inflation, deflation, and other economic uncertainties.

First of all no government, let alone a well educated and informed government, seeks or gambles with, either serious or protracted deflation, or hyperinflation. Both are massively destructive. These conditions would result from a series of circumstances which the monetary authorities would be unable to combat or deal with. This is the view of generational analysis using some really cogent arguements. Its a genuine potential threat and needs to be taken seriously.

Currently the big USA issue is the level of debt; it is now at 90% of GDP and has become politically very difficult to deal with in a conventional way.

Secondly, the worst thing that could happen to America is serious deflation. It was massively destructive in the 1930's when the USA was a creditor nation, but now as a debtor nation it would be economic suicide with a resultant overturn of the social order. The monetary authorities would fight this with everything at their disposal, absolutely everything; it would be a life and death matter.

So how do you prevent a deflationery scenario and pay off this massive debt? With managed inflation at 7% to 14% per annum. In a decade or so the debt is at manageable levels; the dollar now worth only about 3 cents of the current level and is replaced by a "new dollar". The debt is paid off with funny money and the social order remains intact!

This is already happening if you loook at the values of the dollar: the trend of the last year on the dollar index is down quite a lot, and heading down. Also look at the price of gold and other inflation hedges going up.

Most voters are not informed enough to realise that managed inflation is just another tax to spread the burden of the debt. And its in line with the modern lack of economic morality e.g. privatise profits, socialise costs to fix problems. So its a political solution as well.

Of course, managed inflation would push the PE ratio on the DOW and other indexes to a very low levels - I would think to below 8, or even below 6, before stock prices started to rise once more with inflated monetary values, so protecting one's money remains a serious problem.

To be successful, the one thing that the Fed can't admit to is that it has embarked upon this strategy. Countries like China are holding huge amounts of dollars and would take serious exception. As would other nations. The Fed has to deny this forever or it won't work. Even so there could be currency wars, and other wars. And there could be a retalitory strategy which conceivably triggers very high levels of inflation, or even hyperinflation in the US.

Regards, Richard

[vincecate]

So how do you prevent a deflationery scenario and pay off this massive debt? With managed inflation at 7% to 14% per annum. In a decade or so the debt is at manageable levels; the dollar now worth only about 3 cents of the current level and is replaced by a "new dollar". The debt is paid off with funny money and the social order remains intact!

With interest rates around 2% the interest on the debt takes up like 1/4th of the taxes or 1/8th of the budget (they spend nearly $2 for every $1 in taxes). If interest rates go up to 8% then the interest on the debt would be about equal to the taxes. At this point it becomes really obvious to everyone that the only thing they can do is keep printing money, no way to stop. Then everyone flees the dollar and you get hyperinflation. With the US debt and deficit levels where they are you can not have a "managed inflation at 7% to 14% per annum" for a decade. It will never work.

[richard5za]

Then everyone flees the dollar and you get hyperinflation. With the US debt and deficit levels where they are you can not have a "managed inflation at 7% to 14% per annum" for a decade. It will never work.

I think we are debating the timing and quantum rather than the end result. I agree that everyone flees the dollar; that the dollar becomes worthless; that is the end result of managed inflation over time and the objective of paying off the debt in funny money, or with the "new dollar" worth 40 to 50 times the current dollar. I don't agree that this inevitably produces hyperinflation, although it does carry the risk. However it is a lesser evil than deflation for a debtor nation.
Regards, Richard

[John]

Dear Richard,

Then everyone flees the dollar and you get hyperinflation. With the US debt and deficit levels where they are you can not have a "managed inflation at 7% to 14% per annum" for a decade. It will never work.

I think we are debating the timing and quantum rather than the end result. I agree that everyone flees the dollar; that the dollar becomes worthless; that is the end result of managed inflation over time and the objective of paying off the debt in funny money, or with the "new dollar" worth 40 to 50 times the current dollar. I don't agree that this inevitably produces hyperinflation, although it does carry the risk. However it is a lesser evil than deflation for a debtor nation.
Regards, Richard

I definitely don't agree that everyone flees the dollar.

John

[John]

Here's a video worth a few minutes of time:

QE1 & QE2 Quantitative Easing Explained Cartoon
http://www.youtube.com/watch?v=FJchFmYD4Co



John

[richard5za]

I definitely don't agree that everyone flees the dollar.

John

Dear John,
That's because you are a proponent of deflation and ultimate total economic disorder. Not because this is chosen but because it is forced upon the government by circumstances.
I am suggesting that the Fed will do everything, absolutely everything, to avoid the economic suicide of deflation. They also have a huge debt to deal with. Reducing the dollar to worthless handles the debt, and doesn't need to create hyperinflation if managed.
Richard

[at99sy]

So how do you prevent a deflationery scenario and pay off this massive debt? With managed inflation at 7% to 14% per annum. In a decade or so the debt is at manageable levels; the dollar now worth only about 3 cents of the current level and is replaced by a "new dollar". The debt is paid off with funny money and the social order remains intact!

With interest rates around 2% the interest on the debt takes up like 1/4th of the taxes or 1/8th of the budget (they spend nearly $2 for every $1 in taxes). If interest rates go up to 8% then the interest on the debt would be about equal to the taxes. At this point it becomes really obvious to everyone that the only thing they can do is keep printing money, no way to stop. Then everyone flees the dollar and you get hyperinflation. With the US debt and deficit levels where they are you can not have a "managed inflation at 7% to 14% per annum" for a decade. It will never work.

It would seem to me that this all depends on how one defines the words inflation and deflation. I see a disconnect with the interest rates and the purchasing power of our currency. Purchasing power is falling rapidly/ driving prices up at the pump, grocery store, commodities, hookers etc.. But Housing, jobs and wages are falling like a rock. While the interest rates have remained stable/low.

Am I correct in thinking that inflation is typically seen as a rise in interest rates, Wages, and prices due to devalued currency? While deflation sees a decrease in costs due to a more valuable and scarce currency?

Vince the post link you provided to Gonzo Lira makes sense. I can't see our illustrious leaders solving this problem any time soon. They(the World) are being forced to play the game until the first guy blinks. Then the proverbial SHTF!

This morning I see gold at $1505 silver at $44+ and Oil back up to $109. The market is trending up about 125 points on higher earnings numbers. Earnings up due to increased productivity not on demand in most cases. Fire half your workforce, make them work faster and longer and you get more profits, earnings go up with lower revenues. It's like magic. Who knew!

sy

[vincecate]

If interest rates go up to 8% then the interest on the debt would be about equal to the taxes. At this point it becomes really obvious to everyone that the only thing they can do is keep printing money, no way to stop. Then everyone flees the dollar and you get hyperinflation.

I definitely don't agree that everyone flees the dollar.

John, in the proposed scenario, if inflation is 8% to 14% and interest rates are 8%, and the interest on the debt is more than the total taxes, and the government is printing money like crazy, you would still put your savings in US debt? Really? I am sure no country has saved their currency after getting that far gone.