We ALL worry about inflation, but then the news dies down a bit and we push in another 'major issue' according to the news media. Funny how they can easily munipulate the masses with their massive hype machine...anyway when inflation was hot Tim McMahon, editor of InflationData.com, was busier then anyone on the planet! I've asked him to enlighten us on the inflationary storm...please enjoy the article, comment below, and visit InflationData.com for more info.
====================================================================
I must be getting old. Things seem to change awfully quickly. It seems like just yesterday that gasoline was well over $4.00 a gallon and inflation was 5.6%. It was July 2008 and inflation was the hot topic, everyone was worried about costs climbing exponentially. It seemed like every time I went to the store things cost more. Oil was a speculator’s dream and a car owner’s nightmare.
And then came the crash. Oil prices came crashing down along with the stock market and the banks. The big news was deflation. The media was beating the drum about how bad deflation was and how this was the first deflationary period since 1950. Funny, I didn’t hear anyone at the gas station or the grocery store complaining about falling prices.
What’s so bad about deflation anyway? Why were they worried? Well, first of all, there are two types of deflation. The first is price deflation and that is when prices at the pump and at the store are lower than they were previously. And of course no one minds that (except bankers and I’ll explain that in a minute). The other is asset deflation and that is when your brokerage account and house price goes down. Now that’s another story…
This brings us to bankers. You would think a banker wouldn’t like inflation; he loans out money and gets back payments that are worth less and less. But in fact, the price we pay for a loan takes that into account i.e. the banker builds a cushion into the interest rates to cover the expected inflation. So what bothers a banker is rapidly increasing inflation that he hasn’t built into his profit margin.
On the other hand, a little inflation is good for a banker’s business. It creates easy money and a mindset among the people that they are getting something for nothing from the bankers by paying with less valuable dollars. So they are more likely to take out loans and “spend the money before it depreciates and buys less”.
On the other hand, you would think banks would like deflation because they loan out money and get paid back with increasingly valuable dollars. But once again, the bankers disagree. When money is scarce and getting more valuable several factors conspire against banks. The first is that people are less likely to borrow when they can defer purchases and things will be cheaper in a month or two (or twelve).
Second, people defer purchases because they fear the economy is getting worse and they may not have a job next month or their hours have been cut. And finally, the banks themselves fear the same exact forces so they increase their lending requirements and basically will only loan money to people who don’t need it (or want it).
This brings us to why the news media fears deflation so much. It isn’t because they fear falling prices, or that it will hurt the common man, it is because it is bad for banks, i.e. they can’t loan money. So the media has to stir up fear of deflation in the minds of people so the government can crank up the printing presses and bail out the banks.
Once the printing presses and the bailouts get going, massive sums of money can be transferred to the bankers so they can get their $11 Billion dollar bonuses again. And once again all is right with the world. Or is it? Where are all these Billions coming from? Not taxes… it must be magic, the money is created out of thin air, with the stroke of a pen the money is there.
Unfortunately, magic has a price. As these magic dollars are spent the supply of money grows and as the total supply of dollars grows, each individual dollar becomes worth less and less. The first recipients think it is an ordinary dollar and accept it at face value, but over time, people begin to realize that these aren’t ordinary dollars, they are magic dollars… so they become worth less and less, until they are totally worthless. If we look at our inflation calculator we see that from August 1979 until August 2009, a mere 30 years, prices have increased 192.46% so if we go to the “How much would it cost calculator” we enter $1 as the original cost and 192.4% inflation and we find that it would now cost $2.92 … almost 3 times what it cost in 1979! So your savings would have to triple just for you to be able to buy the same things.
That is why inflation is often called the stealth tax. It secretly steals your savings and transfers your money to those at the head of the line who first got the magic money. And who is that? The government and the banks. Unfortunately, the volume control on the magic money machine has been cranked up to full blast and the machine is cranking out Trillions of dollars… more than has ever been dreamed of before. And the day the piper will be paid is rapidly approaching.
Typically, it takes about two years for people to realize that the money isn’t real but simply “magic money”. We are currently about one year into that two year grace period, and the smart money is buying up hard assets like gold, knowing that it isn’t paper and is the only form of money that isn’t simultaneously someone else’s liability. And unlike magic money, it can’t be created out of thin air.
At InflationData.com, we constantly monitor the inflation situation and aren’t fooled by the current deflationary numbers. We know it is simply the calm before the storm. Those Trillions of dollars are like little hurricane seeds beginning to swirl off the coast, gaining speed and force until they mature into the monetary equivalent of Hurricane Katrina. If you’d like to keep tabs on the progress of this monetary hurricane, you can join our list of inflation watchers at http://fintrend.com/ftf/SubscriptionForm.htm and we will keep you up to date on what is happening in the inflation arena.
Tim McMahon, editor
InflationData.com
“The Place in Cyberspace for Inflation information”
Speaking of printing presses, have you seen the printing presses from Nanosolar? Printing added value. Destroying old industries.
Welcome to the future...
Good points Nino, I agree with your long term outlook for the US and all the reasons why we currently "suck", as you say. I also agree that all is not lost. Yes, China will be in trouble in 20 years and the tide will turn etc., etc. But for now they will be dictating much of how American political and economic policy is directed via pressuring with economic, and other reprisal threats, whatever administration is holding the Whitehouse, to do it's bidding(ie: threatening to call due the debt on the bonds they've been buying to finance our party, now that we can't buy much of their junk anymore and who knows, maybe a proxy war here and there.) Twenty years is a long time, and if push comes to shove, they will play whatever cards they hold in the mean time. Right now they're holding mostly Aces, and America has a pair of Twos. American debt on mortgages and credit cards etc., along with the derivatves house of cards built by Wall Street and friends has set us up for more deflation/deleveraging. On this we too agree. This kind of activity usually results in ecconomic setbacks of some magnatude. This current one has been and will yet be a big one. The Congress, Bush and now Obama want to believe that, by cranking out fiat money, things will get back to the way they were. That place being we were before the chickens came home to roost in the stock market, housing market and now or soon to be the crashing comercial realestate market (and don't forget those billions out on student loans market). Now that the public has had a good spanking, they are saving money at rates not seen in 50 years. They are not likely to go out and spend, run up more credit card debt, refinace their homes to buy more of whatever. Besides, the banks and CC Cos have pulled the easy money plug. So, we're in for a long term correction, not a quick return to "party like there's no tomorrow". Unemployment will go up more over the next few years because, fewer people will be buying previous levels of ...whatever. If anyone thinks the Chinees and thier toadies (the Russia, N. Korea, Iran) won't be taking every advantage on every front to prolong our less than opportune status, they ned to reconsider. The Chinees don't necessarily want our total destruction, they just want to be in charge of what we do and how we do it... and they want to be paid back with money that's worth something. We will be beholding to them for quite some time. In the mean time there's likely to be some fireworks.
Wall Street and their friend are suckering in new victims right now with this fine looking bear market rally.
Russia is rich in resources but it's government and economic
substructure is as corrupt as ever, and liketly to stay that way for the next twenty years as well. Sort of Mexico East.
As far as printing money earlier to keep us out of debt, that was not to be because of fear of causing inflation. We had a bout with that in the 70s and Greenspan was not about to let that happen again on his watch...no mater what. Now they are printing and the money is going into banks, and other entities who have no intention of putting it into circulation. Inflation will not be a problem until it leaves the vaults in mass quantiteis...I won't be borrowing it. Neither will many others for a while. Most businesses have learned a lesson on easy debt. It may be some time before the majority step back into the deep end to splash around.
It's not that we can't or won't work our way out of this, we will...eventually. It's just going to take a lot longer than the politicians would have us believe and by the time we get there it will have changed the way we look at debt and spending for...whatever. If there won't be a real bonified Depression with all this, it will be a darned close second. Boy! I hope I'm wrong on all this! God bless and help America.
"But for now they (China) will be dictating much of how American political and economic policy is directed via pressuring with economic, and other reprisal threats, whatever administration is holding the Whitehouse"
A recent 35% tariff on tires, cap and trade bill, GM bailout and "Buy American" is hardly a position that demonstrates China is in the drivers seat. This is just the beginning of a US reaction to a Chinese version of Smoot-Hawley. The seeds of protectionism are being sown. China is screwed if the US adjusts the trade imbalance too quickly. The US economy is like a rubberband compared to a wood stick in China.
The only thing I am more certain of at this point is that US consumption and wages will be at best flat and probably in decline for several years. The US Dollars printed to stabilize the economy that find their way into appreciating assets should have a hard time moving prices too far beyond the poor fundamentals they are contributing to. I am more concerned about the economic consequences of protectionism on a broke economy.
Another interesting detail to this issue is the fact that Dollar became a borrowing mechanism for the carry trade. Dollar Libor to 0.292%, comparing to Yen Libor 0.352%. For the first time in about 75 years it is cheaper to borrow USD than Yen.
Just another sign of times...
Some seem to think this is all a big "conspiracy", with a small group of people pulling on the levers. What is happening today is no different than what has happened for centuries; countries trying to control resources. Whether it is Britain or the US or China.
The interesting thing about this is how complicit everyone in the US has been in all this. Yes, that includes going into debt to buy a bunch of junk at Walmart. How do you think China ended up holding so much of our debt? This problem started when we stopped saving and started spending money we didn't have. That has become our worst enemy.
http://www.nytimes.com/2009/09/18/business/global/18yuan.html?_r=1&th&emc=th
Chinese masters ? CN will be imploding on itself in about 20 years from now. One child per household policy will be making CN top heavy with age. I believe it was around 1880 when China had the second largest economy in the world (hmmm just like they do now). Just look at Japan for a current example of demographic issues. At one point Japan was supposed to be taking over America. Debt to the moon with uber low % rates. Just wait until their % rates go higher from their lack of a young working class to pay for social services (sound familiar?). They will be imploding as well. Surprising how all this talk of stimulus packages, printing presses running out of ink talk prevents you from realizing that Japan did the same thing only to be suffering from deflation 20 years later and with an equity market still down 75%. Deflation is really the phenomenon of the domestic currency appreciating relative to domestic assets. That's why ppl said "cash is king" and you didn't really know what they meant when deflation was taking hold. The Fed doesn't want deflation b/c the gov and most of America has no cash, only assets balance by the requisite liabilities. Fiat paper and credit are treated differently for some reason. Only credit is worse b/c collateral values decrease while debts stay the same. Russia broke ? They have a huge mass of arable land that would destroy the American Ag sector not to mention their tremendous energy resources. The fact of the matter is their economical system has not been managed for efficiency (yet.) The worst thing for America was loosing it's monopoly power of creating goods & services by having a capitalist economy. By the USSR being destroyed and China liberalizing it's economy towards a capitalist model (think copying Hong Kong all around CN) we have created competitors for the worlds consumers (hence ongoing threat of deflation). If rather than borrowing all this money over the last decade and increasing the national debt by 7 trillion dollars we could have printed the money and had much lower debt. America has such a huge R&D advantage over the rest of the world it's not even funny. Just look up the # of patents coming from different countries. America will suck for a while but we will remain in control of the reins. The Fed has been running a carry trade and investing in emerging markets. It's not as bad as it appears. Fears allow agendas to move and you ppl are buying into it hard.
Inflation may well be coming down the pike, but the reply made by "Dave" above(13:26:47)was so eloquent in its totality of historical perspective I think it should be read by every American with a brain that works. I intend to copy it along with my comments here and send it to everyone I can. I would add that the reason Obama and his gang halted the construction of the missile defense system of eastern Europe this week was not to pacify the Russians (hell, their broke) but to assuage the Chinese. The Chinese hold tons of US Debt, and now crappy dollars, and are in the "Creditor" position. They will call the real shots from now on as it relates to American policy. The Chinese and Russians joined together last year to denounce the defensive missile system for our Eastern European ally's, begun by the Bush administration. As of last week it's "Good luck and goodbye". Now we have Obama (the current puppet of the world bankers) bowing to the Chinese...our new Masters. C.
The Dollar
What is the dollar worth anyway , you don't hear much about that anymore,just print more of it. When I was in Japan in the mid sixties the dollar was worth 360 yen ,look at it now.
The reply posted by "Dave" above (13:26:47) was so eloquent in its totality of historical perspective I think it should be read by every American with a brain that works. I intend to copy it and forward it, along with my comments below, to everyone I can.
I would add that the reason Obama and his gang halted the construction of the missile defense system of eastern Europe this week was not to pacify the Russians (hell, their broke), but to assuage the Chinese. His messangers are, right now, winging their way to Prague to deliver the news to the Eastern Europeans. The Chinese hold tons of US Debt, and now crappy dollars, and are in the "Creditor" position. They will call the real shots from now on as it relates to American policy. The Chinese and Russians joined together last year to denounce the defensive missile system for our Eastern European allys, begun by the Bush administration. Today, it's "good luck, Adios". So now we have Obama (the current puppet of the world bankers) bowing to the Chinese...our new Masters.
The perfect inflation and economic collapse safe investment is firearms. Especially those paid for on zero interest credit. Guns are transportable, easily tradable or liquidable, financially appreciable in all markets, they provide a very defined usability, and many are made by your friends and neighbors in the USA! This will keep your money away from the government and especially filthy bankers. My non-binding or responsible advice is to convert your 401k into AR-15s, Remington .308s, and Colt 1911s. Good luck in any economic/sociological environment.
Our creditors, who have provided the US with goods and services, are less likely to want to hold the massive amounts of dollars they currently have. What do they do with those dollars? They buy hard assets like gold, silver, copper, wheat, corn...
Those Trillions of dollars are like little hurricane seeds beginning to swirl off the coast, gaining speed and force until they mature into the monetary equivalent of Hurricane Katrina.
The US debt has reached $11,046,247,657,049.48
What Does 11 Trillion+ Dollars Look Like?
"Calm before the storm"? You have no idea how apt that monicker is.
If the means and opportunity even exist in your world for you to exercise your productive capacities to acquire that $1.00 in your pocket, how difficult was it and how long did it take you to acquire it? And how much will it buy in your world? Ouch.
In the final analysis paper money ultimately must be matched with a tangible or productive asset. This is a rule that central bankers have violated with immunity in the post WWII era. Now their miscreancies have grown so egregious that enormous levels of new debt are incurred to pay old debt, not for productive capital investment. The precious metals have been the preferred tangible, productive and monetary asset through recorded history, and crude oil (read, "Petro-Dollar") during the last century. However, during the last half-century (after the post-WWII Bretton Woods Agreement among the victors of WWII), central bankers recognized they made a mistake financing the rapid rise of fascism in Europe, and agreed they would be better off supporting smaller wars and intelligence battles around the world at the expense of nationalism and loyalty and stable personal economics among unsuspecting publics. Having won the worst war this planet ever saw, it became easy for them to believe that they, the visionary constructs of their minds, and their policies were invincible.
Global productivity is approximately reaching its quantitative limits for uniform growth because of the cost of debt, the price of scarce commodities, the availability of natural resources, the dysfunction of markets and the cost of money. Now the central bankers and non-governmental organization think tanks and trade groups can pick and choose which special interests will prosper, and manipulate politicians and CEOs who implement their will; however uniform, global growth of tangible wealth will not occur during this century, and they realize that economically-illiterate Americans are still living so well that they will never revolt again as they did 230 years ago. Furthermore, with the universal use of intelligence systems and rapid deployment of violent official reactions, a revolt would never take root among the populace and would be quashed quickly and severely.
The prevailing agenda of central bankers will be to appease Chinese investors. Anything they do with the American and European economies and monetary systems will be intended primarily to keep the Orient at bay while they continue to enrich themselves and aggrandize their power. You, your family, your nation as your Constitution once conceived of it, your earning capacity, your productive skills, your savings and investments will just be more casualties in their path. The historic economic changes occurring right now are so uncertain and so enormous that the central bankers will play their hand boldly in order to avoid complete confiscation of our country by the Chinese and the hostile Middle-Eastern oil-suppliers, but they also prefer to avoid a major war with China that would cripple Western Civilization. A miscalculation now such as they made during the 1920s and 1930s in Europe would turn out differently during this nuclear era than the slaughter of a mere 50 million people during WWII.
Well said! I agree 100%. When I said "smart money" was buying up gold, one of the major sources of that "smart money" is the Chinese. In addition they are also buying up copper, oil and everything they need to run their economy and not only the commodities themselves but the long term supplies and the means of production. They know where the dollar is going and aren't planning on being left holding the bag. They want the real goods and even more critically, the supplies and means of production. This is something that is rarely mentioned. For us "long term thinking" is a couple of years out when natural resources prices skyrocket due to a weak dollar. For them it is 10, 20, 50 years out, when they will control the means of production so the price won't matter.
Hello
"The first is price deflation and that is when prices at the pump and at the store are lower than they were previously."
That is false definition, unfortunately for the readers of the blog; prices are just a consequence of inflation or deflation (inflation/deflation are monetary problems - an increase in money supply and credit; in our society, both go together).
"Once the printing presses and the bailouts get going, massive sums of money can be transferred to the bankers so they can get their $11 Billion dollar bonuses again."
When credit contracts (like today) that basically means money are destroyed (when credit expands, new money are created to satisfy credit demand; is that simple). Now when one makes such a statement as "printing presses get going", one needs to be more precise and bring some figures to the table (ie compare the amounts of money spent and printed by the FED vs. the amount of contracting credit; surprise, the credit destroys at a much faster rate than FED is printing).
The true state of affairs is that the FED can not print as much as they want as there is a bond market out there, unfortunately for them (except if they control the whole bond market which is a possibility, I'm not capable of saying that, but I hardly believe it). And this goes against the contrary belief (the FED control rates; they don't, the market does that; is the market stupid? yes, quite often). They can ignore the bond market, but that will induce a panic among investors and citizens with nasty consequences.
Is inflation an imoral thing? Yes, but morality is not policy anymore (nor among congressmen, nor at the FED or banks); more, the markets don't care about morality.
Regarding deflation, imo it's a cure for today's problems our societies do face (unsustainable levels of debt, both at the private and public levels). The fact the government creates more debt via all sorts of programs is cheered by many analysts and the market, but actually that is not a good thing. Time will tell how these things develop. If the FED and Treasury obtained something today for sure it's volatility; that's a sure thing.
Unfortuantely, our modern definition of "Inflation" has come to mean "Price Inflation" rather than the true historical definition which was "monetary inflation which often resulted in price inflation". We have become so brainwashed that we can't tell the difference between cause and effect anymore. For that reason when I am referring to the effect I try to call it "price inflation" to differentiate it from the cause which is primarily an increase in the money supply.
A while back, I wrote an article on the difference between Webster's 1983 definition and The 2000 definition. You can see the full text here: http://inflationdata.com/inflation/Inflation_Articles/Inflation_Definition.asp
I agree with Gunnar. Answer this simple question. Is there more or less "money" in the world today vs. a year or two ago? Less, way less. They are not going to be able to pump it up fast enough and asset values will fall hard. Heck the only thing even remotely holding them up now is "free" money.
Creation and descruction of credit is not mentioned in the article. Much of the economic activity is taking place as a result of creation of credit. What happens if the credit volume contracts faster than the "printing press", as he calls it, creates money? That would be deflation.
You are absolutely right, credit contraction was definately one of the factors that triggered the initial deflation. But it was much more complex than ever before in history because of the advent of derivatives of derivatives of derivatives. It was a giant house of cards and no one knew (or still knows) how big it actually was. Credit is a major factor in the "velocity of money" i.e. how fast it turns over. Right now, as I said in the article, banks are reluctant to lend so the velocity is low. At the peak, they were begging you to borrow money. High velocity creates a multiplier effect and easy money but the distinction still remains between asset deflation and price deflation. Right now the money is flowing into the banks and the stock market so you might say we have asset inflation even though the prices of things we buy haven't started to rise yet. So the idea of uniform overall inflation or deflation is somewhat of a misnomer in the complex modern economy... the question is where is the money flowing to and whare is it flowing from?