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Inflation or Deflation

Not much really going on for the past few months worth posting here, but found this small article in zero hedge this morning, which was kinda interesting.   The article came from the blog Economic Collapse.  My glass is again half empty.


With all the good news, the booming economy (according to the talking heads on Bloomberg) a cap being put on all those new housing starts by DR Horton and other mega builders to raise prices by over $30K, Ford going to pump out another 200,000 cars in the US because of increased demand, and with Lumber futures collapsing (kinda a contrary indicator for housing construction) it is all onward and upward to DOW 16,000, oh yes, here in the rural backwater gas is now $4 a gallon. 


Called my electrician yesterday, he said he is now charging $55 an hour from the time he leaves his shop, because gas has gone up, insurance has gone up, and all of his expenses have increased. ( mean . . . he is only 35 miles from my farm).  


I am sure that cannot be correct because everyone knows we only have 1% inflation according to the Burnank yesterday on TV . . . not to mention . . . the best bridges in the world, we only had one interstate bridge collapse yesterday . . . who says we need to improve our bridges, dams, locks, and highways in this country, well . . . no one because Congress knows what is best for us. 


Well enough whining, here is the article that has finally reinvigorated my negative view of this economic quagmire we find ourselves in.  Adios Amigos. John


Will It Be Inflation Or Deflation? The Answer May Surprise You

Tyler Durden's picture

Submitted by Michael Snyder of The Economic Collapse blog,

Is the coming financial collapse going to be inflationary or deflationary?  Are we headed for rampant inflation or crippling deflation?  This is a subject that is hotly debated by economists all over the country. 


Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation. 


Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts.  So what is the truth?  


Well, for the reasons listed below, we believe that we will see both.

The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis. 


This will happen so quickly that many will get "financial whiplash" as they try to figure out what to do with their money.  We are moving toward a time of extreme financial instability, and different strategies will be called for at different times.


So why will we see deflation first?  


The following are some of the major deflationary forces that are affecting our economy right now...


The Velocity Of Money Is At A 50 Year Low


The rate at which money circulates in our economy is the lowest that it has been in more than 50 years.  It has been steadily falling since the late 1990s, and this is a clear sign that economic activity is slowing down.  The shaded areas in the chart represent recessions, and as you can see, the velocity of money always slows down during a recession. 


But even though the government is telling us that we are not in a recession right now, the velocity of money continues to drop like a rock.  This is one of the factors that is

putting a tremendous amount of deflationary pressure on our economy...


Velocity Of Money


The Trade Deficit


Even single month, far more money leaves this country than comes into it.  In fact, the amount going out exceeds the amount coming in by about half a trillion dollars each year.  This is extremely deflationary.  Our system is constantly bleeding cash, and this is one of the reasons why the federal government has felt a need to run such huge budget deficits and why the Federal Reserve has felt a need to print so much money. 


They are trying to pump money back into a system that is constantly bleeding massive amounts of cash.  Since 1975, the amount of money leaving the United States has exceeded the amount of money coming into the country by more than 8 trillion dollars.  The trade deficit is one of our biggest economic problems, and yet most Americans do not even understand what it is.  As you can see below, our trade deficit really started getting bad in the late 1990s...


Trade Deficit


Wages And Salaries As A Percentage Of GDP


One of the primary drivers of inflation is consumer spending.  But consumers cannot spend money if they do not have it.  And right now, wages and salaries as a percentage of GDP are near a record low. 


This is a very deflationary state of affairs.  The percentage of low paying jobs in the U.S. economy continues to increase, and we have witnessed an explosion in the ranks of the "working poor" in recent years.  For consumer prices to rise significantly, more money is going to have to get into the hands of average American consumers first...


Wages And Salaries As A Percentage Of GDP


When The Debt Bubble Bursts


Right now, we are living in the greatest debt bubble in the history of the world.  When a debt bubble bursts, fear and panic typically cause the flow of money and the flow of credit to really tighten up. 


We saw that happen at the beginning of the Great Depression of the 1930s, we saw that happen back in 2008, and we will see it happen again.  Deleveraging is deflationary by nature, and it can cause economic activity to grind to a standstill very rapidly.


During the next major wave of the economic collapse, there will be times when it will seem like hardly anyone has any money.  The "easy credit" of the past will be long gone, and large numbers of individuals and small businesses will find it very difficult to get loans.


When the debt bubble bursts, cash will be king - at least for a short period of time.  Those that do not have any savings at all will really be hurting.


And some of the financial elite seem to be positioning themselves for what is coming.  For example, even though he has been making public statements about how great stocks are right now, the truth is that Warren Buffett is currently sitting on $49 billion in cash.  That is the most that he has ever had sitting in cash.


Does he know something?


Of course there will be a tremendous amount of pressure on the U.S. government and the Federal Reserve to do something once a financial crash happens.  The response by the federal government and the Federal Reserve will likely be extremely inflationary as they try to resuscitate the system.  It will probably be far more dramatic than

anything we have seen so far.


So cash will not be king for long.  In fact, eventually cash will be trash.  The actions of the U.S. government and the Federal Reserve in response to the coming financial crisis will greatly upset much of the rest of the world and cause the death of the U.S. dollar.

That is why gold, silver and other hard assets are going to be so good to have in the long-term.  In the short-term they will experience wild swings in price, but if you can handle the ride you will be smiling in the end.

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Senior Contributor

Re: Inflation or Deflation/Farmland Prices and Interest Rates

Say Faust, an article on the AGWEB Site on Interest Rates and Farmland values. Kinda goes with your post here on the Inflation vs Deflation issue. Worth the read, it is below:




Farmland Prices and Interest Rates


By Gary Schnitkey, University of Illinois


Farmland prices continue to increase during the first part of 2013. However, as indicated in this post, farmland prices appear to be in line with current agricultural returns and current levels of interest rates. Currently, interest rates are low, leading to support for high and increasing farmland prices. A rising interest rate environment could lead to downward pressure being placed on farmland prices. In this post, historical interest rates are examined to place the current interest rate environment into context.

Historical Interest Rates

Figure 1 shows the 10-year Treasury constant maturity rate from April 1953 to April 2013. As can be seen, there are two major periods evident in this time series: a period of generally rising rates up to early 1980s, followed by a period of falling rates from the early 1980s until the present. There is variability within these two periods. For example, 10-year rates did decrease for short time periods prior to the early 1980s, and rates increased for short time period after the early 1980s. Overall though, there are two trends: a rising rate period up to the early 1980s and a falling rate period after the early 1980s.

Since September 2011, rates have been below levels that occurred prior to September 2011. Currently, the 10-year rate is below two percent. Given these low rates, the period of generally decreasing rates since the early 1980s appears to have come to an end, as it is difficult to see how rates can decrease further. Moving forward, rates likely will either 1) remain stable at the current low levels or 2) begin an increasing period.

There is some historical support for a lengthy period of stable but low rates. In April 1953, the first month in which 10-year constant maturity rate data exists, the rate was 2.8 percent. Interest rates remained near three percent for an extended period. The rate was 2.97 percent in June 1958, the last time the 10-year rate was below three percent until 2008. There was roughly a five to six year period of stable interest rates in the 1950s, suggesting that a current period of low rates could exist for a relatively long time. Also note that a rise in the interest rate does not necessarily point to an increasing trend. Rises in interest rates can be followed by decreases in interest rates, and not signal a period of increasing rates.

Conversely, there is historical precedent for rapidly rising interest rates, with the most prominent period being the late 1970s and early 1980s. From August 1979 to September 1981, rates increased from 9.0 percent to 15.3 percent. During a one-year period from June 1980 to May 1981, rates increased by 4.3 percent. During this period, the Federal Reserve Bank (FED) tightened monetary policies so as to control inflation rates while also lowering unemployment rates.

Much of the current low current rate environment is attributable to loose FED monetary policy following the financial crisis of the 2008. As a result, attention is given to possible tightening monetary policies in the future. As of now, the FED has not signaled a tightening monetary policy.


Interest rates currently are at low levels, supporting higher farmland prices. While rates are low, there are historical examples of low rates persisting for a long time period. Hence, historical analysis does not suggest that low interest rates necessarily lead to rising interest rates in the near term.

Some are concerned about rapidly rising interest rates and the attendant impacts on farmland and other asset pricing. As occurred in the 1980s, tightening monetary policy could lead to rising interest rates. At this point, dramatic changes in FED policy do not appear to be occurring, suggesting that a rising rate environment will not occur due to FED action.


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Re: Inflation or Deflation

If it is an eith/or proposition I can say unreservedly that it isn't going to be inflation, at least until something scares the PTB a whole lot worse that what has already transpired and they have to resort to real money printing, not just balance sheet games.


Labor has no pricing power and the private debt overhang is enormous.


Here's the tough one for me, though. If there is another severe deflationary scare and they resort to flat out printing money, the bond market would seem to be at grave risk- going from 150 on the 30 year to 0 would be quite a ride and roughly equivalent of deciding that being blown up with dynamite is preferable to gunpowder.


Watch Japan, I guess. I'm actually somewhat in favor (or whatever my irrelevant opinion of Japanese monetary policy could be called) of unconventioanl policies but we'll have to see how the financial world weathers the stress on their bonds that this is setting off.


I have always and forever maintained that the commodity bull of roughly 2003-2011 wasn't a sign of inflation at all, actually more the opposite.  Bush/Greenie made it clear that they were keeping rates low for a long time in part in order to weaken the dollar. In the new unregulated, hyprfinancialized world that just sucked money into commodity investments. (A lot of the dumber part of that money is still laying there in a stale state).


And granted, commodities were probably due one of their periodic repricings, the $Gazillion question is where will the new post-mania equilibrium settle?


Long winded there, my short answer is deflation but the good news is that I don't think you're going to see rates rise much even if the Fed began an exit strategy from QE.  I think the velocity of money chart that you posted is the most telling- back in the 30s they used to refer to that as pushing on a string.


I'd say that for now one should worry more about return of money as compared to return on money.

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Re: Inflation or Deflation

It`s like in the old days when farmers used markers to plant, some would follow the marker every nook and cranny across the field, others would strike out a spot in the distance and be straight as a string with the only crooked rows by the fenceline.  Those that follow the "marker too closly" in the inflation debate are gonna get chopped up.  The bottomline is no administration wants deflation that rhymes with "depression", but to get from here to there there`ll be stagflation, the 4 oz candy bar you buy will become a "3.2 oz candy bar" but the price didn`t go up.  I would love to see a Applebees menu from 3 years ago and compare prices during this so-called no inflationary period.


I suppose the fed has more "tools" in the toolbox since no one thinks there`s inflation yet.  I hear the Yen is off big time to the dollar.  And there`s a Indian gal on tv commercial offering payday loans for 89% interest in fine print.

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Re: Inflation or Deflation

Hardnox- Japan is interesting.  Here is what Kyle Bass discused on Japan yesterday on MSNBC It is seven minutes long and was posted to zero hedge.


I tend to agree with you regarding the important thing now is getting capital invested back, screw the interest or ROI.  Hard assets are being accumulated by those seeking such protection as evidenced by money pouring into farmland and other real estate along with gold and silver, where the cash market (like soybeans) exceed the futures market being driven into oblivion by the traders in New York, even junk bond yields have crashed and everyone are exiting them and sitting on their cash, which continues to increase in value each day, due to the rest of the world being in a state of collapse, but the fact remains fiat money is still fiat money and only paper.  


Like Kyle Bass states in his interview, if one can they should borrow money from Japan and invest it in hard assets or investments elsewhere, beause the the Japanese Currency is only going to decline towards zero value, I think the US is in the same boat, but we are just a few years behind the Japanese.  


He believes it is better to spend it now than to hold a fiat currency and let it deteriorate to nothing, and that is what is happening in commodities and the farmland and residential property markets right now.   John

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Re: Inflation or Deflation

BA - glad you mentioned the Applebees menu.  If you enjoy French dip sliders at applebees, you will now notice that they are about half the size they were six months ago and you get three small portions.   Nice to see someone else noticed what is going on in the down sizing of products but prices stay the same.   I am sure glad there is no inflation in the US, the Bernank and the boys really have our best interests at heart, when the exclude fuel and food from their inflationary index.   Adios Amigo.   John 

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Re: Inflation or Deflation

It seems I used to leave there so full I could barely walk and the price didn`t seem too bad.  Now I leave there wouldn`t mind getting another bite to eat before leaving town and I`ve lose alot of weight in the last 6 monthes so it isn`t like I`m eating like a pig anymore.  And the bill, my God! you figure a 20% tip and a family of 4 is at 80 bucks, that`s like 11 bushel of corn!

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Re: Inflation or Deflation

Actually, using the US 30 year as an example was poorly chosen although in an inflation the 30 year would certainly suffer on account of rising yields but not in terms of default, or if it did everything else would be toast too, including farmland and gold.


Better example is junk debt which is currently at all time highs as everybody chases yield. Problem is, of course, that if the value of the bond goes to 0 the yield has limited utility.  When I say return of capital I'm speaking more of risk of default than of inflation risk.


Actually, as counterintuitive as it might seem, in a flat out deflation the best investment would be a mattress full of good old $100 Federal Reserve Notes.


I'm really not on the hyperinflation train, thus far the inflationistas have been thoroughly skunked.

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Re: Inflation or Deflation/Deflationary Spiral

Bomber Ben will never, ever, in a million years allow a  Deflationary Spiral to develop in our current economy. I have read his papers and research on the 1930's Depression and the resulting Deflationary Spiral that occured. He knows that the Federal Reserve was the major cause of the 1930's Deflationary Spiral. The Federal Reserve/Goverment should have been greatly expanding M1, M2, and M3 , which are measurements of our countries Money Supply. Instead, they actually DECREASED the money supply which then caused the very severe Deflationary Spiral to develop and we all know how that turned out.  The Federal Reserve has many, many, tools today to head-off a DS (DEFLATIONARY SPIRAL).If this country did head into a Deflationary Spiral like the 1930's, Mr.Federal Reserve will pull out every trick in the book to avoid a DS. A DS would have this country on it's knees in know time.

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Re: Inflation or Deflation/Deflationary Spiral

Everybody has to believe something and so far that has been the profitable thing to believe, assuming one didn't have very unfortuate timing in the severe ups and downs.


I tend to agree with you that heaven and earth will be moved before permitting a deflationary spiral to take hold. But I also think that the current recovery is no where near a self sustaining equilibrium and given the prevailing caution about continued fiscal and monetary stimulus, is quite likely to falter.


So I'll partly buy the deflation then inflation argument- it will probably take a whopper of a deflation scare to really get the green light to crank things. 


But even then I'm having a hard time feeling real easy about the effect on the bond market.


We're riding a 30 year bull market in bonds that is at the conventional 0 bound.  The 30 year bull has also been coincident with the bull market in most asset classes. 


It's a tough point for me to see beyond with much clarity.



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