March 20, 2008

Inflation. Deflation. Printing Presses. Oh my.

The general consensus on this board was for a period of wild inflation, followed by the unavoidable deflation as The Great Unwinding takes hold.

Helicopter Ben, being the brilliant economist he is (and in control of the printing press), told us in 2002 that under no circumstances would there be deflation.

So now you have the market selling off anything connected with protecting yourself from inflation, and a rush toward US t-bills paying 0.47%, which if that's not deflation I don't know what is.

So, knowing what you know and seeing what you see, are you in the Inflation camp, or the Deflation camp?

I'm still without confidence because of all the factors at play. I see wild inflation right now, I feel deflation is to come, but I see the government and the Fed pumping out dollars. So deflation with a debased US dollar which is still deflation but may look like inflation.

Someone get me some Tylenol. And here's Schiff's view on Inflation/Deflation/Fed Policy


Anonymous said...

peter schiff's father is in jail for being a 'income taxes are illegal' guru.

i do like schiff though. i bet the schiff women are characters too , whata country huh!

Ed said...

Where's oil? Oh yea at $102....down from $112 on Monday.

Oil and Gold early 2008 = housing late 2005. Due for a massive fall. It has begun.

optimist prime said...

I'm getting more optimistic about the economy because it finally rewards people who don't buy stuff they can't afford. Home prices are going down like they should, and gas prices are going up like they should.

even though the fed prints $, does a lot of it essentially disappear under these conditions? for instance, there are home loans that people may get stuck with for the rest of their lives, but many will never pay them in full. the banks write them down. shareholders lose their $, and the $ pretty much disappears from the economy. the [insert credit driven widget here like homes, SUVs] go on fire sale so cash is king. wall st got their bonuses and transaction fees. housing and stock gamblers who knowingly took a risk got fleeced. right? wrong?

Afterthought said...

What people have to include in their calculation is that for every outstanding dollar of debt that cannot be repaid, the Fed/taxpayer will "loan" an additional dollar to bridge the gap.

When that cannot be repaid, they will loan an additional dollar etc.

If every country were doing this; yes, you would have deflation, but in a global economy, demand and supply will simply shift outside of America's boders.

Translation: America is bleeding itself dry, but not getting a transfusion.

Anonymous said...

I agree. Some prices will drop in the short run but as the economy falls, players in all types of products will fail, supply and choice will drop and competition will decrease and this will help drive up prices.

Then the US governement will keep on printing debt to pay for projects to stimulate the economy. Infrastructure projects will balloon worlwide and keep commodity prices high.

Plenty of Boomers will be forced into retirement, they'll start collecting their SS so that means even more money entering the system without someone to earn it in real time.

Don't forget, America's goal is to make this debt overload shrink. Inlfation is the best route.

In the great depression, many products didn't get all that cheap they just became unavailable. House house prices dropped like a rock, that's where the deflation came from!

Anonymous said...


Schiff is totally wrong here even though he's being right all along. Right because the commodity boom. Wrong because for some stupid reason he think he's safer in Europe and Asia.

I think he'll be surprise and change his tune soon.

When the economy sucks, everything sucks. Plus, with everyone broke already, who will be raising prices?

Also, if you dig deep, the fed has been actually shrinking the money supply. Dont take from me, take from Mish and Garry North. Mish is definetely my hero when it comes to economics. Just about everything he professes makes alot more sense than Schiff.


Anonymous said...

Anon 11:40,

I have no clue what you are talking about. When people are going out of businesses in an industry and players and dropping like flies, what makes you think that the ones left will be able to raise the price (go tell Ford, GM, Chrysler to raise prices now), when in the first place there is little demand. While you are talking to the car manufacturers, why wont you go and tell Starbucks to raise prices too. Heck go for Walmart, Target, etc. If you don't understand what I mean, I mean all these are now in a price war to sell.

The US does not print money like you think. Yes, they can in theory create CREDIT from thin air, but they cannot control where it goes and CREDIT is not the same as MONEY (If they were the same, Bear would have not gone Bankrupt as they are loaded on credit derivatives, CDOs, MBS, you name it). Those CDOs are sure paying for projects right now.

Sure, inflation is the best route to decrease the debt. Please do a little research on Zimbabwe for a great example of how great inflation works to eliminate debt.

During the Great Depression there was DEFLATION, everyone knows that.

If you think about it, there is a lot of CREDIT out there, in bank's balance sheet. I call this garbage CREDIT, because it is worthless. This CREDIT needs to be cleansed "DEFLATED" for the system to re-adjust and go back to normal. Of course in the process, houses, food, clothing, oil, etc, etc go down in price. I personally dont like metals, but metals should hold since they are seen as a safe heaven. Metals are not like treasuries though. The safer bet here is treasuries here.

I believe that with all the CREDIT that is already out there. And taking into consideration that CREDIT is NOT MONEY, we are headed towards DEFLATION here. We have seen house prices hit first, we have seen stocks take a hit, we will see commodities, like oil and others take a hit as CREDIT dries up and everyone realizes that all that CREDIT was a huge pile of crap. The US will go into a deep recession, followed by Asia, followed by Europe. When this happens look for the dollar to rally against all major currencies and some of those other "stronger" currencies to go belly up.

A nice long, deep recession is not a great thing, but this will only strengthened the US and the world economy.


Gabor said...

Deflation relative to real money (gold). Inflation relative to fake money (paper dollars). Why is this so hard to understand?

Anonymous said...

My guess is what's happening with commodities going DOWN in the last few days is the leveraged buyers getting out before they lose money. I think the metals and materials will be propped up in the ling run by other countries unloading their dollars and seeking safe havens. Panic selling of anything in markets is the norm today. Also massive global inflation, like others have said, starting with US Fed policy to inflate people out of falling house prices. Maybe in the long run, an 800 square foot house for 500K will be completely normal thing, what with wood, copper and all the energy it takes to make cinder blocks and drywall. So all those poor suckers who bought in 2006 in Sacramento for 400K, if they hold on for 10 years (and can make the payments, and live there as their primary dwelling) can clear 100K on paper. OF course that doesn't help folks out who couldn't afford them in the first place- but I have no pity for them. Plenty of pain to go around everywhere.


happy homeowner in the stix said...

Don't bother with the tylenol, Keith. Go straight for the tequila. ;)

ben's butt boy said...

Hyperinflation and USD collapse (2-3 years), followed by a deflationary depression (5-10 years). Oh joy...

Anonymous said...

I think you've got too much faith in Schiff. He made a good call but economically he's all over the map. Schiff's ravings sound to me an elaborately constructed fantasy where assets he doesn't like go to zero while assets he likes go parabolic. It can't all simultaneously be true. If the dollar's really done for then hard assets including US real estate will have to rise. If the US consumer is done for and wages are stagnant then commodity prices cannot continue to rise parabolically because the demand will dry up, including overseas demand because a glance at world equity markets shows that their economies are not going to "decouple" from the US. He raves about inflation while pointing to raw materials, but somehow we're to ignore the huge fraction of our annual expenditures that pay for housing, services, etc.? His notion that we could have inflation as measured in dollars but deflation as measured in gold is very amusing - I have yet to see people trying to buy stuff with sacks of gold. Industrial demand for gold isn't great - much of the demand is for "investment" (i.e. the gold is hoarded). I could have made a similarly specious argument about how prices last year were deflating as measured in shares of APPL, or really anything that happened to be going up in price faster than everything else. Sheesh, how about some perspective here. Over short periods of time there are always swings in prices of assets that move at differential paces. Would Schiff argue that we were experiencing deflation in dollars during the 80s and 90s as the price of gold fell off a cliff? In short, listen to Schiff, and others, but then look around at what's really happening, and think for yourself.

Anonymous said...

Well, I remember when the media made Cheney's tax details public in 2007 and he had put all his money into TIPS. Inflation it is.

Anonymous said...

I'm going to make it simple for you:

* The average American consumes 25 barrels of oil a year. Population in the US = 304 million

* The average Chinese consumes 1.3 barrels per year. Population in China = 1.4 billion

* In India, less than one barrel per year. Population in India = 1.2 billion

Almost every current human endeavour from transportation, to manufacturing, to electricity to plastics, and especially food production is inextricably intertwined with oil and natural gas supplies.

* Commercial food production is oil powered. Most pesticides are petroleum- (oil) based, and all commercial fertilisers are ammonia-based. Ammonia is produced from natural gas
* Oil based agriculture is primarily responsible for the world's population exploding from 1 billion at the middle of the 19th century to 6.3 billion at the turn of the 21st
* Oil allowed for farming implements such as tractors, food storage systems such as refrigerators, and food transport systems such as trucks
* As oil production went up, so did food production. As food production went up, so did the population. As the population went up, the demand for food went up, which increased the demand for oil.

Any questions? Glad to help.

Anonymous said...

I think you've got too much faith in Schiff...blah blah blah...

Apparently you haven't read his book. Have you? You didn't mention one investment suggested by him. Lots of experts here on Schiff, without even reading his book. I won't even waste my time explaining. Read his book first! Read Jim Rogers books, too, while you're at it. Then come back to talk about Schiff.

Anonymous said...

peter schiff's father is in jail for being a 'income taxes are illegal' guru.

That only gives more credibility to Schiff. Do you like to work your arse off to pay taxes so Bernanke and Bush can give to their cronies?

Anonymous said...

I say deflation on whore prices, as more and more realtors get laid-off (no pun intended).

BTW, who else is going to spend the China-Stimulus-Check at the t!tty bar?

Anonymous said...

Guys, Guys,

Deflation relative to gold and inflation relative to the dollar has been happening for the last 7, 8 years. This is where Schiff was right.

We are seeing house prices fall in dollars, we're seeing commodities fall in dollars, we are seeing stocks fall in dollars. We will see Starbucks drop their prices in dollars. We will see Walmart (and the others alike) drop their prices in dollars.

Why is this so hard to understand? It's happening right before your own eyes.


Anonymous said...

It's funny though guys.

I was just watching MSNBC and the after hours retards are saying that this is already over. What a bunch of freaking loosers. Im shocked they havent been calling a top in equities and home prices for 5 years, like HP has.

Now that shit started hitting the fan, all of a sudden, it's already over folks. Just like that. Banks are already cleansed of their garbage, etc, etc.



Anonymous said...

Apparently you haven't read his book. Have you?

No, I've been listening to him blather on as the bear-du-jour talking head on many many TV programs. In particular, the link that this blog entry provides. What, he's been "quoted out of context"? LOL.

Anonymous said...

No, I've been listening to him blather on as the bear-du-jour talking head on many many TV programs. In particular, the link that this blog entry provides. What, he's been "quoted out of context"? LOL.

Hey dumbsh!t. Why don't you be a little more specific? What's he been wrong about exactly? If you've got some better info then let's hear it otherwise STFU.

Big Cheese said...

I like Peter Schiff but remember he is going to be biased since he has his own insstitution to pump. That's why he's bothering with all the media appearances. He's been right so far but remember what the Germans say: that trees don't grow into the sky. Eventually gold and foreign currencies will become 'expensive'. Remember these are also being bid up by speculators due to general nervousness and uncertainty but this 'premium' has limits and does not drive prices up to the moon.

The Fed will try and use rate cuts to stimulate people to spend. This in turn hurts the dollar because the US still carries a large deficit and is showing lagging growth. Banks in our country and cutting interest rates so more people are loathe to hold dollars. So commodities traded in dollars go up as the dollar goes down. Consumers feel this pinch.

However to have inflation you need to complete the full cycle of dollars chasing services that chase dollars again. This is often referred to as the 'velocity of money' and, along with the issuance of new money, is another requirement to hyper-inflation. The money the Fed is issuing is for the banks to use to hold off their rotting junk paper and toxic loans and is just keeping them alive. It is also allowing banks to drop their interest rates paid to savers to shore up their profits. But can you get a 4.5% loan any more? No you can't and even though the banks have access to cheap money from the FED they are not yet loaning this out to businesses and consumers. This point is the key thing to watch for as once this starts then inflataion will hit in earnest!

In the meantime outside of commodities, gold and energy prepare to see asset deflation take place even measured in US Dollars. Cars, houses and luxury items will be cheaper next year than this year. Secondhand items will become bargains. If you have cash consider what durable goods you'd like to have and buy accordingly.

Keep an eye on what the banks are doing with their cheap money as they are the distribution points for the Fed. If they aren't distributing that money then keep expecting asset devaluation and fixed wages. Once the banks start passing along the money then you need to be asking for massive salary increases and change your plan to dealing with hyperinflation.


Comments and criticisms to my argument are welcome, even if you wish to post this as a thread!


Paul E. Math said...

I'm with Schiff on this one. I see deflation relative to real money but inflation relative to USD.

Bernanke is a really smart guy. He has studied the last depression under a microscope, especially the vicious cycle of deflation. Bernanke has already shown a great deal of creativity in fighting deflation and will stop at nothing to prevent it. Our lawmakers will also cooperate by running higher and higher deficits.

But the kind of deflation that Bernanke can't control is, as Schiff says, relative to real money (gold, silver).