[oswald622]

We are currently in a liquidation, debt repayment & hoarding phase where the velocity of money is very low and price deflation continues apace. Loads of money have been created by central banks in just the past few weeks, but the secondary banks are only using them to shore up their balance sheets.

Now according to Peter Schiff, Jim Rogers, and J.H. Kunstler, this is just the first phase - the popular analogy is of a tsunami, where the sea first recedes and then returns with fury. This makes intuitive sense: it seems a logical inevitability that recklessly loose monetary policy must lead to inflation eventually.

But what will be the proximate cause - the catalyst, the trigger? What will actually mark the inflection point from deflation to hyperinflation? What will get people rushing to spend the cash under their mattresses?

One strong contender may be an international run on the dollar, as it becomes clear that $2.3 trillion in US Treasurys hasn't been delivered. But my bet is on actual shortages of valuable goods like food and fuel, which would be more chaotic and more in line with the thesis-antithesis-synthesis M.O.

Any other ideas out there?

[Quinny]

Both?

[Micki]

I thinking about the possibility of super shopping spress by the fed member banks.
i.e. They have access to enormous amounts of cash and a lot of assets are selling at bargain prices.

Let's look at the gold scenario for instance.
-Big banks like JPM etc are short gold and there isn't physical available.
-They seem to think that gold price isn't going to go down in any meaningful way (i.e. volume of selling rather than just price drop) OR they even expect price to appreciate. (that is why they are covering and have been doing so for 2 years on TOCOM)
-Gold mining shares are selling at prices as if POG was $400.
-To resolve the situation they could try to take over miners with good reserves. But it needs to be done in a big fast swoop so prices don't appreciate too much before they secure companies.
Given the low volumes of selling, I am thinking that it would be off-market bids rather than market buying of shares as the latter would drive up prices too fast.

This could happen with other assets as well not just gold mining.
It would kick in inflation very suddenly as payments of assets are made and the money enters the machine.
If this is somethign they are intending, they should do it before dollar weakness sets in if they want to buy any foreign assets and before people wakeup to any risk of inflation. (i.e. while shareholders are thankful to get out of their shares at 30-40% premium to current prices.)

I don't know yet if this is feasible in practice but it would seem like an ideal outcome for the big banks.

[patience]

My guess is a cascade of runs on countries: Iceland, then Ukraine?, Russia? Latvia, Bulgaria, etc., where money flees from first one country then another, with the US at or near the end of the chaos.

As for a trigger? OPEC's reduction in oil production, if sustained, could do it. The whole system appears to be stretched as tight as a banjo string, so any disruption could do it, per the experts on chaos theory. Mendelbrot's (sp?) interview I saw somewhere said something like that.

[Jellric]

But my bet is on actual shortages of valuable goods like food and fuel..

Economics is not my strong suit but I actually understand most of this as I have been trying to educate myself on the topic recently.

One think I am not clear on is why we would be expecting shortages. Is that because suppliers would be witholding their products knowing they can demand a better price in the near future?

[Revi]

I don't know what will happen. The price of most assets is half what it was a year or two ago. The price of the things we buy every day is about the same or more than what it was a few months ago.

Deflation or inflation?

[patience]

Jellric,

My take on the shortages is the sort of thing that's going on with Iceland, where their currency lost most of its' value, so they can't buy the imports they need. Another aspect is the possibility of an absolute lockup of credit making normal trade impossible, both between countries and between entities within a country. Such as the grocer, hardware store, and gas station can't get a "line of credit", to order goods, or, the supplier could refuse to ship if his bank doesn't trust the other guy's bank. There are rumors of this now, in international trade.

edit: Revi,

Some of both, as far as prices are concerned. By the economist's definition of the terms, they are strictly a MONETARY phenomenon. That is, deflation is not enough money in the system, and inflation is too much money for a healthy system, for a given amount of productivity. (All you experts feel free to correct that.) Rising are falling prices are thus said to be symptoms of the money supply and the current supply/demand situation. What I think is going on just now, is a complex mix of these things, where we can get seemingly contrary things together, like falling home prices (big supply, low demand due to lack of qualified borrowers, and tight money from the credit crunch), while at the same time, food and other goods rise in price, due to anything from tight supply, high demand, to currency exchange rates.