[odegaard]

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.

Inflation camp == plus 1

Deflation camp == zero

[patience]

This analysis says we have two problems. Money velocity is the one the Fed is having trouble with.

http://macromarketmusings.blogspot.com/ ... ation.html

A quote referring to the second graph: (Dunno how or I'd post the graph.)

"This figure shows that that declines in the money multiplier and velocity have both been pulling down nominal GDP. The decline in the money multiplier reflects (1) the problems in the banking system that have led to a decline in financial intermediation as well as (2) the interest the Fed is paying on excess bank reserves. The decline in the velocity is presumably the result of an increase in real money demand created by the uncertainty surrounding the recession. This figure also shows that the Federal Reserve has been trying to offset these moves by significantly increasing the monetary base. Therefore, the large increase in the monetary base has been far from inflationary; rather it is fighting off the deflationary forces created by by the declines in the money multiplier and velocity."

So, he says we are in this ocean of debt with TWO hunks of cement wired to our feet--falling money multiplier, and falling velocity. (Velocity is falling, so the Fed is trying to compensate, BUT, each $ the Fed/Gov throws into the works, only produces 86 cents of GDP, IIRC, at present, that is, the money multiplier is less than one = bad.)

FOR THE PRESENT, I'd have to say deflation is winning. One more reason to expect TPTB to resort to naked printing, and maybe not too far off. Depends on too many things for me to guess the timing.

Of course, PRICES are what most affect me, and that is a somewhat different kettle of fish, being affected by money flows, and supply/demand changes, and what all. The next hurdle for me (I think) is to deal with rising commodity prices as money flees bonds. We saw what that did last year, with oil at record levels. A lot of retail prices either rose or refused to fall in the face of a contracting economy. I think we get another round of that this year, and when retail prices go up, it takes a lot to bring them down again, even after commodities drop.

[DantesPeak]

This analysis says we have two problems. Money velocity is the one the Fed is having trouble with.

Good points, explained well. Yes the money velocity thing looks 'deflationary' right now, but that could change.

Here is an article that summarizes the deflation/inflation points made above:

Mass Deflation or Inflation?
Pushing on a String
by Gary North
June 20, 2009

The FED would inflate the monetary base, he said, but this would not reverse the price decline. The commercial banks would not lend. The FED would therefore push on a string. Its attempt to inflate would fail.

His argument remains the central pillar of the deflationist camp – a tiny band of intrepid non-economists who have seen their founder's prediction refuted by the facts in every year since 1973. But economic events since mid-2008 seem to indicate that Exter may have been right, they insist. They continue to predict price deflation. The FED is at long last pushing on a string.

Deflationists point to the M1 money multiplier, which is headed sharply down. See for yourself.

This is the result of decisions by commercial bankers to lend money to the public (no) vs. pile up excess reserves at the FED (yes). Banks are not lending. Deflationists conclude: serious price deflation lies ahead.

Inflationists respond to the falling M1 money multiplier along these lines. "Bankers must pay depositors a rate of return. The banks are being paid by the FED for excess reserves, but only at the federal funds rate: barely above 0%. If banks do not start lending, they will be bled dry by payments to depositors. The bankers at some point must lend, if only to buy Treasury bonds that pay more than what banks pay depositors."

http://www.lewrockwell.com/north/north722.html

[patience]

A matter of time before the deflating ends and the inflating hits main street.... Which is why I bought a little silver. I wish they would SHIP it to me now! "Due to unprecedented demand in the silver market, your order will be delayed......"

I guess some other folks had that idea, too.

FWIW: Ordered from Northwest Territorial Mint on 2/11/09. They said 12 to 14 weeks delivery, they start counting when the check clears, and allow themselves an additional 30 days grace period on top of that. Which 30 days they are using now. I would not do business with these people again for anything. They do offer to buy you out at market price at this point, but that is a no-win due to the high premium of the original price.

Once burnt, shy forever, in my case. Just thought the world oughta know the facts.
I'll wait 'em out.

[ColossalContrarian]

I started this thread a while back -> http://peakoil.com/open/byte-dollars-decouple-from-real-dollars-t38415.html?

Here is the question I asked:

The inflation/deflation debate has been going on for awhile now and it appears that most people here see an inflationary or hyper inflationary future ahead for the US.

My Questions:

The Fed can keep pumping the markets with more and more 1's and 0's, but those aren't real dollars like the ones we have in our wallets right?

Which begs the question, what is the ratio between “byte dollars” and real dollars?

Could this be deflationary for real dollars? Could there be a scenario where real dollars decouple from “byte dollars”?

It was and still is my belief that byte dollars and real paper dollars will decouple. This will be enormously deflationary. It's just a WAG, but I see people losing faith in credit and electronic money. I use barter as an example in the thread.

Basically I realized that it's impossible to print 1 trillion dollars, let alone 7 trillion... It's physically impossible for the fed to print that much. They can enter it into a computer but that won't matter any more. The only solution will be a new currency but "pre-crash" paper dollars will be worth a fortune.

[mattduke]

A matter of time before the deflating ends and the inflating hits main street.... Which is why I bought a little silver. I wish they would SHIP it to me now! "Due to unprecedented demand in the silver market, your order will be delayed......"

I guess some other folks had that idea, too.

FWIW: Ordered from Northwest Territorial Mint on 2/11/09. They said 12 to 14 weeks delivery, they start counting when the check clears, and allow themselves an additional 30 days grace period on top of that. Which 30 days they are using now. I would not do business with these people again for anything. They do offer to buy you out at market price at this point, but that is a no-win due to the high premium of the original price.

Once burnt, shy forever, in my case. Just thought the world oughta know the facts.
I'll wait 'em out.

NWTM is notorious for their delays, although in the end everyone seems to get the product. Stick with apmex.

[patience]

mattduke,

Thanks. Will do.

[rangerone314]

So what's the consensus here? Short term deflation, followed by longer term inflation.

I guess the $100,000 question is when does everything get obliterated by hyperinflation.

[hillsidedigger]

So what's the consensus here? Short term deflation, followed by longer term inflation.

I guess the $100,000 question is when does everything get obliterated by hyperinflation.

When? 3 to 5 years, with a complete unwinding taking a little longer.

[patience]

"When? 3 to 5 years, with a complete unwinding taking a little longer."

Well, I'm hoping it gets strung out for that long, but feel like I need to be prepared for the "sudden stop" that Karl Denninger talked about in his "10 things to do now" Ticker essay. As in, some climactic trigger event causing a crash that stops the economy dead in its' tracks.

At the very least I think we should be prepared for a bank holiday, job loss, or devaluation of the dollar, then pray that we don't get all three at once.

[odegaard]

So what's the consensus here? Short term deflation, followed by longer term inflation.

I guess the $100,000 question is when does everything get obliterated by hyperinflation.

The shrink ray gun strikes again!


If the size of packaged food at the grocery store shrinks in size does that count as inflation or deflation?
I'm getting confused here.
It used to be 2 quarts back in the good old days.

[evilgenius]

It's my guess that the rally will die as it becomes clear that a nation with high and increasing levels of unemployment cannot sustain corporate earnings. The second quarter of '09 can be fudged, that is the sum total of what quantitative easing can do. Fall will bring the truth.

Yes, treasuries are going to be the only safe place to keep money. Next up is cash. Gold could hold value, in this one sense alone. Gold will never again be so cheap in terms of a percentage of one's yearly income that an ounce costs. If the Greatest Depression hypothesis holds out gold could cascade to unimaginably low levels, but earning power will fall faster still. An ounce will be the equivalent of several months total salary, even if it is only worth $30, in the extreme go back to the actual thirties level case. The thing is, if you were into treasuries you would do much better.

Why not balance your investments even in a time like this? Why load up so as to totally commit to any one economic outlook? If you are buying as much gold as you can right now maybe you won't lose, then again, maybe you won't gain either.

[hardtootell-2]

It's my guess that the rally will die as it becomes clear that a nation with high and increasing levels of unemployment cannot sustain corporate earnings. The second quarter of '09 can be fudged, that is the sum total of what quantitative easing can do. Fall will bring the truth.

Yes, treasuries are going to be the only safe place to keep money. Next up is cash. Gold could hold value, in this one sense alone. Gold will never again be so cheap in terms of a percentage of one's yearly income that an ounce costs. If the Greatest Depression hypothesis holds out gold could cascade to unimaginably low levels, but earning power will fall faster still. An ounce will be the equivalent of several months total salary, even if it is only worth $30, in the extreme go back to the actual thirties level case. The thing is, if you were into treasuries you would do much better.

Why not balance your investments even in a time like this? Why load up so as to totally commit to any one economic outlook? If you are buying as much gold as you can right now maybe you won't lose, then again, maybe you won't gain either.

It is hard to invest for all possible outcomes. IMHO precious metals are a good way to have the currency of last resort in case the masses wake up to the fact that the gubbermint is just printing and there is widespread rejection of fiat currency worldwide. Ultimately nothing can beat owning and living on arable land with water and wood.

Someone asked me "what if the government or someone takes that away?" My answer "if that happens then there will be no Rule of Law or Property rights so all bets are off". (That was the situation in Zimbabwe when white farmers were put off their land by government thugs). Insert your drastic reaction of choice here.

[rangerone314]

So what's the consensus here? Short term deflation, followed by longer term inflation.

I guess the $100,000 question is when does everything get obliterated by hyperinflation.

The shrink ray gun strikes again!


If the size of packaged food at the grocery store shrinks in size does that count as inflation or deflation?
I'm getting confused here.
It used to be 2 quarts back in the good old days.

Keep that up and eventually they will be Ben & Jerry-sized...

[rangerone314]

It's my guess that the rally will die as it becomes clear that a nation with high and increasing levels of unemployment cannot sustain corporate earnings. The second quarter of '09 can be fudged, that is the sum total of what quantitative easing can do. Fall will bring the truth.

Yes, treasuries are going to be the only safe place to keep money. Next up is cash. Gold could hold value, in this one sense alone. Gold will never again be so cheap in terms of a percentage of one's yearly income that an ounce costs. If the Greatest Depression hypothesis holds out gold could cascade to unimaginably low levels, but earning power will fall faster still. An ounce will be the equivalent of several months total salary, even if it is only worth $30, in the extreme go back to the actual thirties level case. The thing is, if you were into treasuries you would do much better.

Why not balance your investments even in a time like this? Why load up so as to totally commit to any one economic outlook? If you are buying as much gold as you can right now maybe you won't lose, then again, maybe you won't gain either.

How about instead of stockpiling dollars, gold OR treasuries, all of which may have issues in the near and far future, stockpile massive amounts of food, including canned goods? You can't eat bills, gold or treasuries.

[Arsenal]

How about instead of stockpiling dollars, gold OR treasuries, all of which may have issues in the near and far future, stockpile massive amounts of food, including canned goods? You can't eat bills, gold or treasuries.

+1

Ammo has had a better return than all of those.

Food, water, land, tools, firearms/ammo, PMs, treasuries. In that order IMHO. Of course all the prepping in the world won't help if you don't establish a like minded community.

[Pretorian]

How about instead of stockpiling dollars, gold OR treasuries, all of which may have issues in the near and far future, stockpile massive amounts of food, including canned goods? You can't eat bills, gold or treasuries.

+1

Ammo has had a better return than all of those.

Food, water, land, tools, firearms/ammo, PMs, treasuries. In that order IMHO. Of course all the prepping in the world won't help if you don't establish a like minded community.

Land? You'd better have a really big gun with that deed of yours.

[evilgenius]

I think the best investment by far is in something you are good at that is a means of production whereby you will be able to either sell your product after collapse for whatever is the going currency, or barter it. Ideally this ought to be something for which a certain level of either knowledge or skill is required to make it happen, so that nobody can steal your equipment and then replace you.

A few examples would be;

Farming
Distilling
lens making
medicine (making or practicing at various levels from 1st aid on up)
All aspects of tool and die making

down the road
sale or trade of electricity from your renewable power source
sale or trade of your homemade biofuel(s)

This is just a quick list. What else is there that this community can come up with?

[Arsenal]

Land? You'd better have a really big gun with that deed of yours.

Multiple.

Thus the nickname......

[Arsenal]

This is just a quick list. What else is there that this community can come up with?

Water management
Vet Animal care
Leather works
Salvage/Recyclers
Metal working
Communications - Amateur
Glass blowing/production
Some form of Law enforcement.
Welding