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Posted: 6/15/2009 6:21:24 AM EST
One of the major topics here, in the past year or so, has been the economic meltdown and the predicted inflation that seems sure to follow. There are several schools of thought about inflationary times ahead. As some of you know, one of the fears last fall '08 was not Inflation, but a a rapid Deflation, which can be just as bad or worse than Hyper-inflation. Deflationary fears are still valid and being watched by many.

Just read an interesting article, written in "plain english" showing how you need more than just an expanding money supply to create inflation. Hopefully this may help some folks understand better what inflation "is" and the factors needed to cause it, and keep it rising.

Personally I think we (me included) get so focussed on a future development, we can miss the other possibilities. Let's not hang our hats on Inflation being the gauranteed outcome. We think it's a forgone conclusion. or is it???

We should certainly prepare for inflation, but we should also prepare for deflation, as either could still occur.


Here is the article (I inserted some underlines):

Although most folks define inflation in terms of rising prices, the classic definition of inflation is expansion in the quantity of money and credit.

To realize inflation, economies need a mechanism for creating more money and credit supply. In modern economies, that mechanism is primarily the central bank. Central banks, such as our Federal Reserve, are empowered to create money and credit by fiat. Due to political influence, this empowerment is certain to lead to propensity for generating excessive supply over time.

While money-printing machines are necessary, money supply alone isn't sufficient to create inflation.

Demand is also required. People must be willing to take risk. Because modern monetary systems are structured around the pyramiding effect of credit, economic actors need to be willing to borrow in order for monetary quantities to appreciably expand. If folks aren't willing to take on additional debt, then significant inflation can't occur.

So what's happening currently? The money printers are certainly doing their part, as bureaucrats around the world are creating trillions of dollars in potential supply.

But borrowers aren't jumping on board with the same reckless abandon. Instead, they're showing a proclivity for saving and paying down existing debt. Money velocity is slowing dramatically.

Should this risk-averse behavior relate to a secular change in social mood, then one has to wonder whether bureaucrats aren't essentially pushing on a string in attempts to inflate the monetary system.

If this turns out to be true, then do bureaucrats basically pack it in and accept a secular deflationary context? Or do they pursue innovative ways to circumvent the broken credit machine?
Link Posted: 6/15/2009 6:28:33 AM EST
Originally Posted By skunkwerx:
Because modern monetary systems are structured around the pyramiding effect of credit, economic actors need to be willing to borrow in order for monetary quantities to appreciably expand. If folks aren't willing to take on additional debt, then significant inflation can't occur.


Economic actors are still willing to borrow, mainly the U.S. Government. China and other countries are willing to give us credit, and the U.S. is so willing to pile on the debt. While businesses and individual people are important in this cycle, I think the government is the biggest economic actor right now. I think inflation is still on the horizon as soon as this defl. period slows.
Link Posted: 6/15/2009 7:22:41 AM EST
I think the Q.E. shell-game that The Treasury & The Fed are playing right now is key to watch.

When China and the Petro-Arabs determine that there is more risk than reward to buying our debt, the game is over. Of course, we'll continue the circle-jerk of printing money and loaning it to ourselves.

Soon, all of the manufacturing countries (not the U.S. anymore) likely won't take $100 for that TV made in China, now they'll want a risk premium of another $100 to cover the "potential" devaluing float time. This one-to-one ratio could go exponential in short order.

Same thing for anything priced in U.S. dollars. Crude oil is pegged on the U.S. dollar, it will follow the same exponential path. Demand will ramp up to insane levels by the "hoarders" or the people that didn't prepare but are smart enough to understand the situation.

I think not too long from then is when the clueless people of America get an education and will wake up one day and determine they must soon buy something with the worthless FRN's now, or face the possibility of that good being double tomorrow. Hence, hyper-inflation spiralling out of control.

Zimbabwe, here we come.

/depressing post

Link Posted: 6/15/2009 7:41:55 AM EST
it is too complicated for me to figure out, so I concentrate on how to get by no mater what the dollar does.
the market has been corupted by government intervention, and normal investment stratigies may not work
because the feds may change the rules at the drop of a hat. How can a sane person plan in an enviroment like that?

As has bee said many times ,get out of debt, live below your means, prepare for a future with no money,
that way you will be covered no mater what the economy does.

Link Posted: 6/15/2009 9:38:39 AM EST
[Last Edit: 6/15/2009 9:41:07 AM EST by Colorado_Penguin]
As pointed out, the .gov is the big player here. Although in normal economic times, inflation is created as stated above, the big change this time is the .gov.

The .gov is the credit player this time around. And it's already hitting. Take a look at last weeks treasury sale. Interst rates are starting to go up. How does that impact inflation? (Also note, the .gov took on some of its own debt. That's like you paying yourself with a $1000 check for a $900 debt. Oh... now you have $100 extra to spend now as well... But wait... you really are now $2000 in debt. And the result is that US$ is now work 1/2 what it was before you paid yourself. And that assumes the original $1000 debt was worth something.)

Where do you think the .gov is going to get the money to pay that intrest rate? From the tax payer. More taxes will have to be collected, and in order for businesses to make a profit, the price has to go up. Since the quality/value of the product stays the same, it's costing more to produce and sell, resulting in inflation.

And a biggy here, if the .gov can't get all that tax money, it will produce more $$$ and pay itself like above. The key here is to keep China and all the other overseas investors buying out debt. If we continue to buy our own, hyperinflation will show up.

Link Posted: 6/15/2009 11:13:32 AM EST
Originally Posted By jman9599:
Originally Posted By skunkwerx:
Because modern monetary systems are structured around the pyramiding effect of credit, economic actors need to be willing to borrow in order for monetary quantities to appreciably expand. If folks aren't willing to take on additional debt, then significant inflation can't occur.


Economic actors are still willing to borrow, mainly the U.S. Government. China and other countries are willing to give us credit, and the U.S. is so willing to pile on the debt. While businesses and individual people are important in this cycle, I think the government is the biggest economic actor right now. I think inflation is still on the horizon as soon as this defl. period slows.




This is the problem though- The only reason China is still buying debt is because they hitched their wagon to our economic horse. When the horses die, their wagon won't go anymore, but they are VERY concerned and bothered by US debt. A better indicator is Russia, who just stopped buying US debt. They weren't a huge player and they are still buying IMB bonds (which are nearly 50% US bonds anyway), but they are limiting money supply to the US. If and when more countries stop buying US debt there will be a vaccum of currency in the US system...... Meaning deflation. The Federal Reserve is printing in the basement like crazy to head this off, which imo means we will be in for a period of severe deflation, followed by super/hyper inflation with worthless US currency flooding the markets.

Link Posted: 6/15/2009 2:24:24 PM EST
Perhaps we will see both. Stagflation. Cost of most things wil fall, because no one will have any money. But a few things might be higher than a kite. Gas maybe if the OPEC quite taking dollars. Food? Perhaps the gov will "take over" the farms and food distrubition for the peons. Get your cheese and peanutbutter here! But strawberrys from NZ? No one will be able to afford those except the wealthy class. WJ
Link Posted: 6/15/2009 3:17:30 PM EST
Good points all the way around.
My point was to show that we could be faced with something other than inflation.

LadyMacBeth hit the nail on the head...prepare for anything and everything by following the basics.

If businesses do not borrow the additional USD's , it doesn't matter how much money circulates between the Fed and the Central Bank, it never hits the economy, therefor the US economy doesn't inflate.

I find it is an interesting thought, if Americans truly conserve, hold back, and don't borrow, they can print 10 zillion new USDs, but they would sit in the Fed or Central bank and grow cobwebs.

I guess the government would then have to give the fresh USDs away as door prizes to put them into circulation? (Tax rebates?)

I'm not predicting any of this will be the case, just trying to look at some other possibilities.

I don't think the individual preparations change too much, as ladyMcB pointed out.

Be ready for Inflation, Deflation, Stagflation, of any other x-flation that may rear it's ugly head.

Link Posted: 6/15/2009 3:19:28 PM EST
If you are looking for inflation I fear you will be disappointed. Inflation requires the price of assets to increase. How's your home value? up or down? Gold?

Link Posted: 6/15/2009 4:57:14 PM EST
Almost certainly we will see inflation in the next 1 to 3 to 5 years. There are a number of factors at work, but quite simply there are too many dollars chasing too few goods and this will devalue the dollar, alreadyd has. Commodities are priced in dollars and as the dollar devalues those prices increase.

We all remember the $4.00/gallon gasoline which was driven by two factors: an increase in demand and the devaluation of the dollar. I think it was Investor's Business Daily that did a great piece about a year ago showing that if $1.00 = 1 Euro the price of gasoline at that tiome would have been dramtically less.

I moved to Europe in 2001 as the managing director of a European subsudiary of an American company. At that time it took $0.89 to purchase a Euro (still a virtual currency at the time) today it takes approximatelt $1.40.

Link Posted: 6/15/2009 7:06:19 PM EST
Originally Posted By skunkwerx:

While money-printing machines are necessary, money supply alone isn't sufficient to create inflation.


Yes they are. An increase in the money supply is the definition of inflation. End of story.


Link Posted: 6/15/2009 7:56:52 PM EST
Originally Posted By SCW:
Originally Posted By jman9599:
Originally Posted By skunkwerx:
Because modern monetary systems are structured around the pyramiding effect of credit, economic actors need to be willing to borrow in order for monetary quantities to appreciably expand. If folks aren't willing to take on additional debt, then significant inflation can't occur.


Economic actors are still willing to borrow, mainly the U.S. Government. China and other countries are willing to give us credit, and the U.S. is so willing to pile on the debt. While businesses and individual people are important in this cycle, I think the government is the biggest economic actor right now. I think inflation is still on the horizon as soon as this defl. period slows.




This is the problem though- The only reason China is still buying debt is because they hitched their wagon to our economic horse. When the horses die, their wagon won't go anymore, but they are VERY concerned and bothered by US debt. A better indicator is Russia, who just stopped buying US debt. They weren't a huge player and they are still buying IMB bonds (which are nearly 50% US bonds anyway), but they are limiting money supply to the US. If and when more countries stop buying US debt there will be a vaccum of currency in the US system...... Meaning deflation. The Federal Reserve is printing in the basement like crazy to head this off, which imo means we will be in for a period of severe deflation, followed by super/hyper inflation with worthless US currency flooding the markets.



The America of 1900-1950: Production based, gobbeling up rescources all over the world, growing quickly, generating massive wealth, buying up large debt from nations in the midst of on-going wars.....

Sound familiar? That what we did to Europe to become a superpower.... Thats what China is doing to us to become a superpower.... We left Europe behind on the bench, the new B team... China is doing the same to us, because our govt can't turn on the lights anymore without China backed $$$....

The part in red.. America is 5% of Chinas export market.. If our horse dies, they have thier own set of water buffalo to hitch on to.. Thier only conscern for us stems from weather they can divest in us fast enough without compleatly trashing the U.S. bond market, thus ruining thier investment befor we ruin thier investment...

I'm just sayin''
Link Posted: 6/15/2009 8:53:37 PM EST
Originally Posted By tx_snafu:
Originally Posted By SCW:
Originally Posted By jman9599:
Originally Posted By skunkwerx:
Because modern monetary systems are structured around the pyramiding effect of credit, economic actors need to be willing to borrow in order for monetary quantities to appreciably expand. If folks aren't willing to take on additional debt, then significant inflation can't occur.


Economic actors are still willing to borrow, mainly the U.S. Government. China and other countries are willing to give us credit, and the U.S. is so willing to pile on the debt. While businesses and individual people are important in this cycle, I think the government is the biggest economic actor right now. I think inflation is still on the horizon as soon as this defl. period slows.




This is the problem though- The only reason China is still buying debt is because they hitched their wagon to our economic horse. When the horses die, their wagon won't go anymore, but they are VERY concerned and bothered by US debt. A better indicator is Russia, who just stopped buying US debt. They weren't a huge player and they are still buying IMB bonds (which are nearly 50% US bonds anyway), but they are limiting money supply to the US. If and when more countries stop buying US debt there will be a vaccum of currency in the US system...... Meaning deflation. The Federal Reserve is printing in the basement like crazy to head this off, which imo means we will be in for a period of severe deflation, followed by super/hyper inflation with worthless US currency flooding the markets.



The America of 1900-1950: Production based, gobbeling up rescources all over the world, growing quickly, generating massive wealth, buying up large debt from nations in the midst of on-going wars.....

Sound familiar? That what we did to Europe to become a superpower.... Thats what China is doing to us to become a superpower.... We left Europe behind on the bench, the new B team... China is doing the same to us, because our govt can't turn on the lights anymore without China backed $$$....

The part in red.. America is 5% of Chinas export market.. If our horse dies, they have thier own set of water buffalo to hitch on to.. Thier only conscern for us stems from weather they can divest in us fast enough without compleatly trashing the U.S. bond market, thus ruining thier investment befor we ruin thier investment...

I'm just sayin''


if they try to divest very much who is going to pick up the slack they are trying to dump???? This will prove nearly impossible, they could dump it and destroy the investment or keep it going with no further purchasing of our debt which is more likely because they still want to sell stuff to wallmart.

the 5% figure is like the gay folks claiming to be 10% of the us population, total bs.
Link Posted: 6/16/2009 3:48:27 AM EST
Originally Posted By LadyMacBeth:
it is too complicated for me to figure out, so I concentrate on how to get by no mater what the dollar does.
the market has been corupted by government intervention, and normal investment stratigies may not work
because the feds may change the rules at the drop of a hat. How can a sane person plan in an enviroment like that?

As has bee said many times ,get out of debt, live below your means, prepare for a future with no money,
that way you will be covered no mater what the economy does.



This.
I don't understand it either so don't feel bad.
But I expect whatever it is that is going to happen to be really BAD. What's happening now is prolly just the first shot across the bow. If I had to hazard a guess, I'm thinking within about two years or so another severe upward spike in oil prices followed closely by a second leg down for the economy; similar to what happened during the Great Depression (although not for exactly the same reasons).

Link Posted: 6/16/2009 6:52:57 AM EST
Originally Posted By tx_snafu:
Originally Posted By SCW:
This is the problem though- The only reason China is still buying debt is because they hitched their wagon to our economic horse. When the horses die, their wagon won't go anymore, but they are VERY concerned and bothered by US debt. A better indicator is Russia, who just stopped buying US debt. They weren't a huge player and they are still buying IMB bonds (which are nearly 50% US bonds anyway), but they are limiting money supply to the US. If and when more countries stop buying US debt there will be a vaccum of currency in the US system...... Meaning deflation. The Federal Reserve is printing in the basement like crazy to head this off, which imo means we will be in for a period of severe deflation, followed by super/hyper inflation with worthless US currency flooding the markets.



The America of 1900-1950: Production based, gobbeling up rescources all over the world, growing quickly, generating massive wealth, buying up large debt from nations in the midst of on-going wars.....

Sound familiar? That what we did to Europe to become a superpower.... Thats what China is doing to us to become a superpower.... We left Europe behind on the bench, the new B team... China is doing the same to us, because our govt can't turn on the lights anymore without China backed $$$....

The part in red.. America is 5% of Chinas export market.. If our horse dies, they have thier own set of water buffalo to hitch on to.. Thier only conscern for us stems from weather they can divest in us fast enough without compleatly trashing the U.S. bond market, thus ruining thier investment befor we ruin thier investment...

I'm just sayin''




Not as I understand it. Here is the 2008 trade balance for China-


Table 7: China's Top Trade Partners 2008 ($ billion)
*Percent change over 2007
Source: PRC General Administration of Customs, China's Customs Statistics
Rank Country/Region Volume % Change*
1 United States 333.7 10.5
2 Japan 266.8 13.0
3 Hong Kong 203.7 3.3
4 South Korea 186.1 16.2
5 Taiwan 129.2 3.8
6 Germany 115.0 22.2
7 Australia 59.7 36.1
8 Russia 56.8 18.0
9 Malaysia 53.5 15.2
10 Singapore 52.4 10.5


Here is the same chart for 2006

United States = $162.9 (+30%)
Hong Kong = $124.5 (+23%)
Japan = $84 (+14%)
South Korea = $35.1 (+26%)
Germany = $32.5 (+37%)
Netherlands = $25.9 (+40%)
United Kingdom = $19 (+27%)
Singapore = $16.6 (+31%)
Taiwan = $16.6 (+22%)
Russia = $13.2 (+45%)


http://internationaltrade.suite101.com/article.cfm/chinas_top_trading_partners#ixzz0IblEG9cJ&D



It appears that China ships about 30% of is lead-based garbage to the US. Furthermore China is the holder of over 20% of the debt in the US.

http://en.wikipedia.org/wiki/File:Foreign_Holders_of_United_States_Treasury_Securities-percent_share.gif


With a single country holding over 20% of our monsterous debt and selling 30% of their junk, in addition to buying the huge share of their machinery and production facilities from the US, I'd say that China not only hitched their wagon to the US, but is also now feeling increasingly betrayed and vulnerable. Haters of the US and China are now in a great position to topple two giants for the price of one, and that price is beinig paid for by the giants in the first place.

Interesting parallel with China and the growth of the US in the 50s- but the difference is that the US prospered when Europe prospered. We didn't take off financially until the Marshall Plan really kicked in, and the growth in Europe caused Europeans to spend money and new wealth on American stuff. With the collapse of the US, there won't be anyone anchoring China's rise, hence the betrayal. Like President Regan said, the rising tide raises all ships. Well, we have a falling tide dropping all the ships- China included. Wealth (monetary) in the world is being drstroyed- China will not prosper from that either.

Anyway, good discussion-
Link Posted: 6/16/2009 4:54:03 PM EST
In the short term - through the fall, we're going to be seeing DEFLATION, as companies go into 'fire sale', liquidation sales....giving stuff away to get some customers...who themselves have less and less income and less and less faith that they will have retirement income in the future....

Once enough companies collapse though, supply will pass demand and we'll see inflation.

And then either a revolution/civil war or a major world war resulting in the overthrow of all regimes via coups, etc.

I'm sort of doubting we'll have free elections in 2010. There will be some catastrophe that makes it impossible or gives enough cover to propose a 'temporary emergency suspension' so we don't "disenfranchise' all the inner city folk who unfortunately are still dealing with the recent upheavals, blah blah blah."

I don't believe in conspiracies. I believe in human stupidity. And herd mentalities. Now suppose a herd of elite power brokers all go full retard at the same time? Conspiracy or just sad human stupidity?
Link Posted: 6/16/2009 5:06:25 PM EST
There are a lot of things to consider, when someone say inflation!
What does that mean?
prices rise is the simple answer.
not so simple this time.
because so many americans are in debt they will sell their assets for low $$ to make payments on their prefered assets,
so used cars, home entertainment ,boats, other luxuries will go down in price including gold and silver.
While at the same time imports such as oil will go up, but crap from china may go down for awhile.
China is at the point where they can support their own economy and leave us in the learch.
Due to the rice scare last year the price may plumet this season because people have enough?

I am selling all of my excesses while I can , your 2004 toyota is worth 4k now but when gas is 6$/ gallon
there will be so many used cars for sale you could get one much cheaper.
even now used cars are dirt cheap.

It is hard to figure how people will react but scarcity is most assured.
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