[mattduke]

As for bonds, I am expecting credit spreads to widen dramatically once the rally is over. Eventually we will see a bond market dislocation even for high quality debt, but we are not there yet. When it does happen, the collapse of that debt market under high interest rate conditions will be highly deflationary. Purchasing power will collapse, prices, especially for essentials, will rise sharply in real terms while falling in nominal terms. The effect will be catastrophic.

There are different bond markets. The mortgage bond market will collapse because Americans are broke and can't pay. But the government will (continue to) print money to buy up those bonds in a misguided effort to keep rates down. It will continue with quantitative easing to print up and buy treasuries to keep rates down, as the government also would like to borrow lots more money and thus needs low rates. However the collapse of treasuries will occur not because the government cannot make the payments, since it always can. treasuries will collapse when the market expects the cash payments they make to be worth less due to the dollar printing. The flight from treauries will not be to dollars. Indeed it is the fear of dollars that will lead to flight from treasuries. The flight will be to real tangible goods, resulting in a bidding war that will send commodity prices soaring. We do not have a free market, sound money, or limited government. One has to consider interventionism, inflation, and expanding government when anticipating events.

I guess I'm confused when you say that deflation leads to a loss of purchasing power. Deflation, or shrinking money supply, is generally associated with a strengthening of the money's purchasing power, and lower prices.

[Stoneleigh]

I guess I'm confused when you say that deflation leads to a loss of purchasing power. Deflation, or shrinking money supply, is generally associated with a strengthening of the money's purchasing power, and lower prices.

Money appreciates in value in comparison with available goods and services, but almost no one has any. Purchasing power falls due to the disappearance of credit and the loss of income due to unemployment or salary and benefit cuts. The very few who have preserved liquidity will have plenty of purchasing power, as their reserves will grow at a high real rate of interest and prices will have fallen a long way in nominal terms. Everyone else will be out of luck, as they were in the 1930s.

[mattduke]

I guess I'm confused when you say that deflation leads to a loss of purchasing power. Deflation, or shrinking money supply, is generally associated with a strengthening of the money's purchasing power, and lower prices.

Money appreciates in value in comparison with available goods and services, but almost no one has any. Purchasing power falls due to the disappearance of credit and the loss of income due to unemployment or salary and benefit cuts. The very few who have preserved liquidity will have plenty of purchasing power, as their reserves will grow at a high real rate of interest and prices will have fallen a long way in nominal terms. Everyone else will be out of luck, as they were in the 1930s.

So basically you are anticipating a replay of the 30's. Well, the conditions of the US today are very, very different from those of the 30's. No savings, huge government, huge debt, huge current account deficit, foreign wars, no production, huge trade deficit, no gold standard. This is the classic recipe for hyperinflation. Welcome to the board, btw.

[Stoneleigh]

So basically you are anticipating a replay of the 30's. Well, the conditions of the US today are very, very different from those of the 30's. No savings, huge government, huge debt, huge current account deficit, foreign wars, no production, huge trade deficit, no gold standard. This is the classic recipe for hyperinflation. Welcome to the board, btw.

We have a global quadrillion dollar ponzi scheme in the derivatives market, where counterparty risk is huge, particularly for CDS. See From the Top of The Great Pyramid (http://theautomaticearth.blogspot.com/2 ... m-top.html) and Inflation Deflated (http://theautomaticearth.blogspot.com/2 ... ation.html) for my full argument on the inevitability of a ponzi collapse.

The situation is worse in every way than it was in the 1930s. IMO we'll see deflation that will continue until the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. My guess is that will take perhaps a decade to play out. After that, when the power of the bond market is broken due to the collapse of the international debt financing model, then I think we'll see hyperinflation.

[hardtootell-2]

So basically you are anticipating a replay of the 30's. Well, the conditions of the US today are very, very different from those of the 30's. No savings, huge government, huge debt, huge current account deficit, foreign wars, no production, huge trade deficit, no gold standard. This is the classic recipe for hyperinflation. Welcome to the board, btw.

We have a global quadrillion dollar ponzi scheme in the derivatives market, where counterparty risk is huge, particularly for CDS. See From the Top of The Great Pyramid (http://theautomaticearth.blogspot.com/2 ... m-top.html) and Inflation Deflated (http://theautomaticearth.blogspot.com/2 ... ation.html) for my full argument on the inevitability of a ponzi collapse.

The situation is worse in every way than it was in the 1930s. IMO we'll see deflation that will continue until the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. My guess is that will take perhaps a decade to play out. After that, when the power of the bond market is broken due to the collapse of the international debt financing model, then I think we'll see hyperinflation.

So Stoneleigh- obviously the masses are screwed. For an individual/clan would you agree with holding a portfolio consisting of

1) a largely self sufficient farm
2) Precious metals
3) Cash
4) other preps associated with #1- e.g. food, materials, equipment, knowledge, seeds, perennials, annuals, fruit trees etc.
5) no dept

in a stable northern country?

[mattduke]

If you put your money where your mouth is, you'll place your families savings into treasury bonds. You'll have plenty of opportunities too, as the US is about to issue $100B more of them next week. And then $100B the week after, again and again, until they reach $2T this year alone. And then there is next year. That's a lot of paper! That's $6,600 worth for every man, woman, and child in the US. Paper paper paper everywhere. You can paper your walls with it. And yet you suggest that these scraps will increase in value? Don't be fooled by the mandrake machine. Don't be fooled by the fact that rather than printing a dollar, they print a corresponding bond as well. Both scraps are worthless.

[Stoneleigh]

Matt,

I recommend short term treasuries as a cash equivalent. I would not hold long term debt instruments that I would have to sell into the secondary market. My guess is that we'll see a bond market dislocation perhaps within a year, where bond yields will skyrocket (pressing the 'emergency stop' button on the US economy), and prices will fall substantially. A treasury market collapse will be highly deflationary, along with the tsunami of debt default that will result from very high real interest rates.

[Stoneleigh]

Hardtootell-2

That sounds good to me. I'd suggest at least several months worth of cash, and year's worth would be better. It should go a long way.

[Stoneleigh]

For anyone who may be interested, this is my advice in a nutshell:

How to Build a Lifeboat (http://theautomaticearth.blogspot.com/2 ... ow-to.html)

[mattduke]

Matt,

I recommend short term treasuries as a cash equivalent. I would not hold long term debt instruments that I would have to sell into the secondary market. My guess is that we'll see a bond market dislocation perhaps within a year, where bond yields will skyrocket (pressing the 'emergency stop' button on the US economy), and prices will fall substantially. A treasury market collapse will be highly deflationary, along with the tsunami of debt default that will result from very high real interest rates.

It doesn't make sense Stoneleigh. You say cash will increase in value, and yet treasuries which pay out that cash will crash. The only way that would make sense is if you are suggesting the US government will outright default on treasuries. Is that what you believe? I don't believe any politician would default on bonds whose currency they can print. I think that bonds will crash and yields rise, but I think the reason is that the market is realizing the payments are made in soon-to-be worthless dollars.

[DantesPeak]

This IMF report says there were $400 trillion in notational value of outstanding interest rate derivatives at the end of 2007, which boiled down to a net value of about $7 trillion. It’s not clear how much of that $400 trillion is just swaps, but probably most:

http://www.imf.org/external/pubs/ft/wp/2008/wp08258.pdf

So let's assume that all derivatives become worthless and the world financial system losses $7 trillion more. For simplicity, let's assume that the world has already lost $2 trillion from the US housing collapse.

So far the US has spent about $2 trillion to bail out the financial industry and financed about $1 trillion with fiat money, and another $1 trillion with borrowings. About half of that borrowing is from foreign central banks trying to peg their currency to the US dollar.

If there is additional $7 trillion in losses, I expect the US to pick up that loss too. Most likely a majority of that would be financed with Fed fiat money. Since the US is replacing all credit losses and issuing more money, total money - whether it goes into traditional money supply measures or not - increases.

Who said we need a wage-price spiral for inflation? I never did.

To have deflation at this time basically you would have to have all governments say we are just going to sit back, do nothing, and watch the whole financial system collapse - and by the way - have a nice day! That's not going to happen.

MARC FABER: HYPERINFLATION IS COMING
19 June 2009
http://pragcap.com/marc-faber-hyperinflation-is-coming

[odegaard]

...
Who said we need a wage-price spiral for inflation? I never did.
...

This is a myth that absolutely refuses to die.
It's like the nasty grime that's in your bathtub that no matter how hard you scrub it refuses to go away.

An increase in money supply leads to inflation.
You can have completely flat wages and prices for everyday goods will still go up.
Look at Zimbabwe: 3 eggs for 100 billion dollars

What was the cause of Zimbabwe's inflation?
OBVIOUSLY it was because of government running the printing press and had nothing to do with wage-price spiral if there ever was such a thing.

DantesPeak you know what's going to happen next right?
One of these Pollyanna green shoots economists will continue the myth.
Hey that's fine with me.
I've always believed that one man's ignorance is another's profit.

[odegaard]

Matt,

I recommend short term treasuries as a cash equivalent. I would not hold long term debt instruments that I would have to sell into the secondary market. My guess is that we'll see a bond market dislocation perhaps within a year, where bond yields will skyrocket (pressing the 'emergency stop' button on the US economy), and prices will fall substantially. A treasury market collapse will be highly deflationary, along with the tsunami of debt default that will result from very high real interest rates.

It doesn't make sense Stoneleigh. You say cash will increase in value, and yet treasuries which pay out that cash will crash. The only way that would make sense is if you are suggesting the US government will outright default on treasuries. Is that what you believe? I don't believe any politician would default on bonds whose currency they can print. I think that bonds will crash and yields rise, but I think the reason is that the market is realizing the payments are made in soon-to-be worthless dollars.

+1
"I think that bonds will crash and yields rise" == I agree.

Much of the confusion in this discussion can be eliminated if only people were more specific.
When a person says, "I think there will be deflation."
My reply would be deflation in what?
stocks, bonds, houses, commodities, everyday goods
please be more specific.

It is impossible for ALL asset classes to move in unison.
There is always something moving up in price and something else moving down in price.

[patience]

Quote:
"There is always something moving up in price and something else moving down in price."

Yeah, the trick is to figure out WHAT moves WHERE and WHEN. Then you can get filthy rich. I'll give you a big price for a copy of NEXT Friday's Wall Strret Journal, today.

If we kept the terms inflation/deflation defined as changes in the money supply, it would help. I dunno how many of these discussions that I've seen gone haywire with the issue of NOT having a common definition for those 2 terms.

Is the US money supply presently contracting faster than the Fed can add to it? (I think I've seen a general consensus that it is in a net contraction.) That's deflation. NO, I don't think this situation will last forever, or even for very many months before the US .Gov is stuck with gross printing of currency. (Note, I did not call it money.) I agree that the US will devalue the $ in some way, to cover their debts, or just to keep functioning with funny munny.

I haven't any clue how this will play out. however, and bow to the more knowledgeable to figure that out, hopefully, in time for me to get the hell out of the way of the failed system.

[DantesPeak]

MZM is commonly accepted by many economists as the best measure of money supply.

It has been growing very fast since the recession started, although it has leveled out lately:



I've been saying for some time that it takes up to two years for changes to the Fed's money base to have their full impact on the money supply and economy. If that continues, the explosive growth in the money base since last fall has barely affected the money supply yet.

[Ilargi]

All you need to know on deflation, if you choose to not believe me or Stoneleigh, came out once again today.

First, Martin Weiss: New, Hard Evidence of Continuing Debt Collapse!
http://www.moneyandmarkets.com/new-hard ... apse-34202

Then, Mike Shedlock's comment on it: Flow of Funds Report Offers Hard Evidence of Deflation
http://globaleconomicanalysis.blogspot. ... -hard.html

If that's not enough what is?

There'll be inflation, but not before the US gives up on lending from abroad through bond markets, which will take a few years.

[patience]

A quote from TTownfire at Tickerforum:

"The offset is the amount of "money" that is and has been actively destroyed since the first housing bomb went off. One can not look at ONE chart and assume there is a ****-load of money sitting in the vaults of the technically bankrupt investment and commercial banks ready to lend when they are "un-afraid."

If that be true, then all the money the Fed has plowed into the banks is simply sitting there to cover their minimum reserve needs, since the banks have lost enough of their own money to have no reserves of their own.

In support of that, TF and here somewhere, last year I saw a Federal Reserve chart of NON-borrowed reserves that showed virtually all of banks reserves are now borrowed (from the Fed)---correct me if I'm wrong there--I can't find the chart now. It was another hockey-stick curve, showing this. So, doeesn't that mean that the banks don't have any money to loan? If they did, who are the creditworthy parties who would/will borrow and spend money if/when it becomes available, and thus kickstart the economy?

At least, the above is the argument given by the deflation camp.

In answer to that, it seems that the rebuttal most sensible to me is that the Govt is the borrower and deficit spender of last resort, planning to continue borrowing at an unprecedented rate this and next year at least. That runs into the wall of when the Govt's credit runs dry, and presages naked printing, a la, Zimbabwe.

Yeah, it looks to me like the Govt will do that, but that the time is not yet for the effect to be seen in retail prices. Based upon all the above thinking, I'm holding onto every cent I can, spending only on what preps I see as imperative to get, lest we have inflation or supply disruptions, or both. Whatever I can retain, is in roughly 20% junk silver coins and cash, some in hand and some scattered among 3 small local banks.

When I see an obvious move I should make, I'll do so, such as having a list of stuff to buy to dispose of $ if we start major inflation. The flaw in that is a possible overnight devaluation/currency crash like Iceland.

Govt actions seem to be the wild card, if I have it right.

[DantesPeak]

Mish seems to be very concerned about bank reserves created by the Fed just sitting there. He can't see the forest for the trees here.

Let's be very, very clear - that new Fed money is not just sitting there. That extra $1 trillion in new fiat money that the banks keep in reserve was returned to the Fed and used to buy $1 trillion in Treasuries and other investments. The Treasury has already spent $1 trillion which has already gone into the economy.

Historically it takes up to two years for the banking system to fully utilize free reserves. The multiplier effect will create trillions of more dollars later on. In addition, the government has assumed trillions in unrealized off-balance sheet banking losses through Fannie and Freddie already. Effectively the US government has created just as much in new credit there to offset the credit collapse Mish keeps talking about. The government has already guaranteed $12 trillion in credit.

If someone thinks I am wrong about the Fed, and Mish is right, please explain to me how the $1 trillion that the US government spent was just imaginary, and the trillions in new credit the US has committed to the mortgage sector really has no effect on the economy.

[patience]

Great point, Dante! So, this ball is already rolling....