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Meltdown Near? Open Thread

March 11, 2004

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Rich Lancaster notes: This is interesting.

Almost everyone over 5 years is at or below ZERO and Citi are up 60%, what
is wrong with this picture!!!??

Here's a piece of conjecture for you, using Machiavellian deduction logic:

JPMC has been using Freddie and Fannie as losing counter parts in their derivatives scamming! Every derivative contract needs a counter party, and in the case of JPMC and Citi clearly their counterparts are the losers so the banks can win.

I suspect there are many of the Fortune 100 that are controlled indirectly by these two banks - who have tremendous leverage due to the debt burden of the Fortune 100 (I'd love to see a report on the bankers who sit on the boards of these companies - it would tell a story fer sure). The companies, like Enron, allow a JPMC to come in and set up, with the help of bank consultants (like Arthur Andersen), offshore money laundering facilities in the form of derivative and currency trading.

Of course the bank is then in reciept of massive insider knowledge on the trading movements of the company and due to their ownership and indirect control of the Fed they are also aware of interst rate policy, etc. This is how they are able to weave together $50 Trillion in derivatives without fear of a massive blow out, they own or indirectly control all of the moving parts.

I'm sure I've got aspects of this wrong, but the general picture I think is OK.

Posted by manystrom at March 11, 2004 09:26 PM
Comments

Rich,

I think you’re spot on. And in the end, all of us -- the tax payers will be left holding the bag. There is an excellent chapter in “Creature from Jekyll Island” called, “The name of the game is bailout.” It is all about how banks make bad loans on purpose - to third world countries, failing companies, sham companies, Enron, etc. simply so that when the debt goes bad, they can refinance, and string out the income over a longer period of time. They don’t care about getting the principle back – all they want is the revenue stream from the loan. Look at what they're doing to Argentina right now. Does anyone thing that country will *ever* be able to repay the total amount it owes? (The same goes for our national debt)

So the banks make the loan, then when the company (or country) screams and looks like it's about to default, they refinance. And so on utnil when it gets really terrible, and the country simply can’t pay it back, they get a big taxpayer bailout. The money is manufactured, simply printed as old Bernake would say, to pay off the bankers. The inflation thus acts as a hidden tax on the working stiffs. Poor joe six-pack doesn’t know what hit him or why his dollar doesn’t go as far as it should.

The chapter really opened my eyes and made me see things in a new light. If all debt were payed off, then there would be no more money because all fiat money is based on debt. It starts out as a debt by the Treasury, which is monetized by the Fed. It is such a huge, massive revelation to me. That is why they hate gold, because gold truly is independence from the money makers. It is the asset with no corresponding liability, so the bankers can't control it!

I wanted to write an article called “Bankruptcy: Just do it!” There are so many poor schmucks in cc debt (including me) who are just paying the Man. The schmucks, collectively, have power but due to lack of organization, they don’t know how to exercise it. We’re all too busy running on the little hamster wheel just trying to get by to actually do anything about it. It really is the Matrix!

All the talk in the news recently makes it sound like they’re prepping us for Fannie Mae to fail...

- Michael

Posted by: Michael Nystrom at March 11, 2004 09:33 PM

In "Conquer the Crash" Prechter says something to the effect that there will come a time as this thing unfolds where the government starts to try to 'fix' the problem. As soon as you see that you know its over because by trying to fix the problem they 1) let everyone know there is a problem and people panic and 2) unwittingly cause the whole thing to crash faster than it would by screwing it up with wrong headed antidotes.

I think we are talking massive layoffs by mid-summer and bank failures by the election. This is it.

As I was trying to explain to my wife last night...if we were watching the weather channel right now and we knew that for the past 2 hours there has been a tornado watch, we have just reached the point where tornadoes have been spotted in the area. People are starting to call in with sightings of tornadoes (but only a few). We know that from the reports the tornadoes are heading for our house. I have started heading into the basement but unfortunately the rest of the world is still upstairs watching reality shows on a different channel.

Posted by: Michael at March 11, 2004 11:24 PM

One more thing...I'm watching the bond market more closely than ever now. Yields on the 10 yr note have been falling in a corrective manner for a while. I'm on alert for a change in trend for yields. As soon as the bond market selloff begins we should be able to count down the hours to the housing market collapse. All those people with variable rate mortgages don't stand a chance.

Posted by: Michael at March 11, 2004 11:48 PM

Your comments hit the mark! The hamster wheel is a perfect analogy for our consumption-based economy. Wealth creation and savings aren't important anymore. The bankers and Fed officials discovered that they could keep the wheel spinning (at least through their lifetimes) simply by monetizing ever increasing levels of debt.

How long can it continue? Many states are starting to "pay" people to purchase homes through low-income assistance grants, even though these buyers are terrible credit risks. Auto manufacturers have been subsidizing sales for years with incentives, and large chain stores now offer 12 or even 24 month "no payments, no interest" deals. IMO, the next step is direct grants from the government to assist workers in industries impacted by globalization.

Taxes are going up. Rich folks will begin to flee the country in large numbers causing the tax base to implode. It will mark the end of our nation's history as a Republic because the government will have to change radically to deal with the economic crisis. By then Alan Greenspan will be pushing up daisies, and the Robert Rubins of the world will be comfortably retired at the beach resorts.

Posted by: JM at March 11, 2004 11:58 PM

I don't think what you wrote is conjecture at all. In fact I think that some of the losses in derivatives have been hidden and are just now coming to light. Secretary Snow tells us that Fannie and Freddie are too big to fail, but this is not the assumption that the big name financial houses have been operating under. It is foolish to think that if one of these GSE's did fail it, along with their derivative positions, would not seriously undermine the entire US financial system. As far as banks owning major companies and corporations in America, there is a very good and very interesting book called Bank Control of Large Corporations in the US.

http://www.amazon.com:80/exec/obidos/ASIN/0520039378/watsonsweb?creative=125581&camp=2321&link_code=as1

It is dated (1985) it is more relevant today than in 1985. Stop by and check out the Coming Economic Depression at

http://www.markswatson.com/Depression1.html

Mark Watson

Posted by: Mark Watson at March 12, 2004 02:14 AM

I can hardly wait such an opportunity to collectively adopt new rules, new behavior ... Put Nader and greens all over the world in charge.

Posted by: Dubreuil at March 12, 2004 04:10 AM

I can hardly wait such an opportunity to collectively adopt new rules, new behavior ... Put Nader and greens all over the world in charge.

Posted by: Dubreuil at March 12, 2004 04:10 AM

Well... is that it ? dow minus 1,67 right now...
Has not moved up since mid february...
Right now ?
I guess ...

It's no longer the thing to come. We're part of it. launched in it. And this is not financial advice.

Posted by: Dubreuil at March 12, 2004 05:05 AM

If the Citigroup idea is true (in theory, at least), then it follows the US economy is a controlled economy, no different than the Soviet economy which collapsed under stress of the Reagan arms build up.

Will the top down US economy be replaced just as the top down Soviet economy was? The fact that the present US economy forms the basis for the world economy makes such a "transition" unthinkable. In the 80's, the transitioning Soviets sold Levis and Sonys on the streets of Moscow. They had the rest of the world's functioning economies outside their borders to rely upon. What happens when the central method of exchange breaks down with no such outside stabilizing influence?

Seems to me the bears may have missed the 20 year party and there won't be any leftovers to pick through once the party's over. It's not so much that the financial system is destined to break down due to the fact it's not a free market, rather, that the financial system has already become unhinged from the real economy - it will continue to function, the S&P continues sideways, rates stay relatively stable, taxes remain about where they are - yet the underlying "real" economy stagnates and the financial system slowly withers.

And why? Because the downsides of a world economic collapse are so great, the vast majority of people will accept their impoverishment (due to stagnation) rather than risk the very real dangers posed by a final reckoning. Fairness will not prevail. You can bet the folks at Citigroup already realize this.

Posted by: steve at March 12, 2004 05:06 AM

Scenarios are easy write, but prognosticators never commit to saying when this will happen.

I ask how much force will it take; how much collective force the will pyramid bear in Puplava's perfect storm? Which restraining wall will break first? Idunno either. I do know that most of the material I've been reading lately fails to recognize that all players have not relinquished the 'equivalent dollars' method of value. I suspect the correct model is
Confederate Dollars

Posted by: Theo at March 12, 2004 06:52 AM

When you think about it, the banks own everything in this country, if not the world. Hardly anyone owns their house or their car, or any of their material possessions outright. They were all purchased on borrowed money, from the banks.

When you look at how much you end up paying for stuff in the end, it is astonomical after the years and years of interest. Banks have power. My question is whether the bankers are innocent or sinister. If they are innocent, they are just providing a service, and helping us all fulfill our desires. If they are sinister, then they actually are out to manipulate and control the world.

My feeling is that it is the latter, but maybe it is because I'm a simpleton -- I can't imagine what it is they want? Power? What good will it be to be the ruler of an impoverished world?

- Raven

Posted by: Robbins at March 12, 2004 08:58 AM

Precisely as Jefferson warned, first through inflation then through deflation, central banks will take all that we (the people) own.

Posted by: JPC at March 12, 2004 11:47 AM

see the shadows of power by leonard piekoff

Posted by: phillip dru at March 12, 2004 09:17 PM

1 let's see how far that down movement leads us... I'm telling you deflation has started. Started with the low employment figures in february.

2 Inflation (low real interest rates) is good for spenders. The problem lies not in the bankers who take everything but in income inequality and a system where saving is discouraged, and overconsuming encouraged.
AS the richest country, USA ought to be exporting capital to other country, and so should europe. There's something really weird, when the poorest invest into the business of the richs (all the retirement plans), instead of saving for their future spending and when the richest spend and burn income instead of investing what they have for the common good.

Think of it. At the same time : Inequalities have widened, and saving has disappeared in the USA.

Growth fueled by borrowing and not by growth of revenue.

Posted by: Dubreuil at March 12, 2004 10:39 PM

Folks:

Citigroup is not rallying because the stock is undergoing consolidation--shares are passing from the strong (insiders) to the weak (everybody else). The stocks behavior is typical.

Did you guys notice the timing of Robert Rubin's book? It came out in late December. Rubin was Clinton's Secretary of the Treasury AND is now one of the Chairmen of Citigroup. I don't think the book--"In An Uncertain World" was released just to take advantage of the holiday shopping season. Makes you wonder what the Citigroup market models are telling them.

Posted by: Sam at March 13, 2004 01:11 AM

If the Congress passes HR 1920, originally a short technical corrections act to the Family Farm Bankrucpty Act, but the House republicans were frustrated the Senate would not act on the big bankrupcty "reform" act Clinton vetoed twice [1st such law since 1972]....they [Hse GOP] attached the big bill to this little tiny technical corrections act the Senate HAD ALREADY passed. If that goes thru, watch out. It will give lenders broad powers to throw ordinary folks into bankruptcy, no more loan or credit card extensions, no more 'wrapping' a foreclosure of RE into an extended bankruptcy proceeding. It will create a massive dumping of vastly depressed collateral [RE, cars, etc]. This could be a trigger mechanism, although I think it will be framed by a backdrop of some other mega-trend change in the economic zeitgeist. Everyone thinks it's the dollar....that's obvious, but I have it on very good authority, most oil companies, like RD Shell, are lying about their reserves. This could be a biggie for the market. Plus, I hear Russia is now only taking Euros for oil....but the world press has been very careful to downplay this.

Posted by: William at March 13, 2004 03:14 AM

Out of curiosity, Sam, if you're still around. I know that insiders are liquidating shares at the highest rate ever, but what was in Rubin's book "In An Uncertain World"? A brief synopsis for those of us who didn't have the time to read it would be excellent.

Thanks for the news on HR 1920, William. When you say that the big oil companies are lying about their reserves, do you mean they're overstating them or understating them?

Thanks guys. Great website.

- Dirk

Posted by: Dirk at March 13, 2004 11:49 AM

Life is cheap!...meaning labor is cheap.
Please be advised...no lawyers overseas, lawsuits overseas.

To compete successfully:
1) eliminate IRS
2) 2nd language of US should be legal-ease, not Spanish
3) eliminate Federal (private reserve board)
4) acknowledge that we are fighting a
"philosophy"...not a people (ISlam)

Posted by: Bob at March 13, 2004 12:38 PM

Rich-
I bet this is why Neutron Jack Welch of GE dumped all the manufacturing jobs in the States and moved the technology to China- He was always so proud of GECC profits- Always a penny over estimates, what crap-

GE has not contributed to its employee pension plan since 1985- For every dollar in stock they owe eight dollars in debt and Neutron took out millions in options- I pray the crook dies in poverty-

Posted by: k0tex at March 13, 2004 01:19 PM

Usury, killer of men and cities
- Greek Epigram

Posted by: INFINITE RETRY at March 13, 2004 01:40 PM

Dirk, do a search on "peak oil" and you will find the answer.

Posted by: BombShelter at March 13, 2004 01:47 PM

Dirk: The oil companies have been overstating reserves. I have been reading about this for a week now at http://www.lifeaftertheoilcrash.net/. For me, if this web site is correct the depression will be like a walk in the park. Deflation or hyperinflation with no oil crash would be like a day at the beach compared to the oil crash.

I'm trying to take a kind of Carpe Diem view of my life these days. I'm trying to play music more...that's good for the soul. I play guitar, piano and learning the trumpet. I figure that these things will keep me sane through the depression.

Posted by: Michael at March 13, 2004 10:58 PM

Dubriel; Unemployment is really over 10%. Unemployment figures are rigged.

Nader and the Greens should take off their rose colored glasses as well as their Chairman Mao jackets, get a hair cut, wash regularly, and keep their mouth full of tofu and crunchy granola; That way we would be spared listening to them espouse their "Enlightenment" on us.

Posted by: Watchman on the Wall at March 14, 2004 12:06 AM

A) BACKGROUND

I run a public company, so I've gained some exposure to how the public market clearing system works. The large US banks have far more control than people imagine.

It's hard to be succinct, but I'll try and put my thoughts over a couple posts.

The only form of "actual" ownership of a public company is in the form of a stock certificate. When you own stock in a brokerage, you are the "beneficial" owner, but not the actual owner.

You have entered into a trust relationship with your brokerage. That brokerage enters into a trust relationship with the central clearing house in that country.

That clearing house then enters into a trust agreement with the Depository Trust (they refer to themselves as the "tower of power").

The DTC which is owned by the US Federal Reserve and the large US banks, brokerages and stock exchanges registers a stock certificate in the name of "Cede & Co." (cede means to give up ownership). I couldn't find out who owns "Cede & Co.", but it is the nominee company for the DTC.

You may be the "beneficial owner" of shares in a public company, but that is only in the form of a trust agreement which is enforced through civil law. You have no rights of ownership except as what is agreed to in your contract with your broker.

The shares quite literally belong to "Cede & Co.". This little company is the largest actual shareholder of most of the world's public companies.

Posted by: steve at March 14, 2004 12:08 AM

B) VOTING

Rich is right. The banking system controls most Fortune 100 companies through their actual ownership in those companies via Cede & Co.

It is common for a brokerage's customers to have more shares in a company than the brokerage owns. This happens when your brokerage believes the stock is overvalued.

What happens is the brokerage takes your money, prints the trade, but doesn't actually buy any stock. When you sell, they give you cash equal to the value of your trade, but don't actually sell anything.

If the brokerage only has 75% of what they are supposed to have, then they scale your votes down before reporting. They would multiply your total number of votes by .75 before voting to the DTC. If you owned a share certificate, you would get 100% of your votes.

The only one who gets to really vote shares is the "actual" owner of the shares - ie. Cede & Co. They tally the votes from all the brokerages, then vote an "Omnibus Proxy" on behalf of all the beneficial owners.

I bet most of the time, they vote the way they are supposed to, but the count is not audited and it isn't illegal for them to vote differently than the way the reports tally. It would put them in a breach of their trust agreement, but wouldn't expose them to any criminal charges.

In widely held companies, they could report votes for the director they want in charge rather than the director who actually was voted for.

They same applies to mergers and acquisitions and other activities shareholders vote on.

Posted by: steve at March 14, 2004 12:17 AM

C) Naked short selling

When you purchase stock, he selling brokerage has three days to deliver it. Everything is electronic via the continuous net settlement system, so there is no reason it couldn't be instant.

It is common that at the end of three days that the stock doesn't get delivered. The buying brokerage is supposed to buy the stock out of the market and give the selling broker the bill if they don't deliver, but this isn't what happens much of the time.

The buying brokerage likes it if the stock isn't delivered. They have the customer's money and an IOU for the stock, but they don't have to remit any money to the selling brokerage.

If you vote your shares, your vote is thrown away because you don't actually own anything. Your stock is "phantom".

The clearing system tolerates "failures to delivers" and they can be in the system for months or years.

This is part of how they are able to manipulate silver and gold prices.

Posted by: steve at March 14, 2004 12:23 AM

D) Delivery

When a company pays a dividend, everyone that owes stock has to cough up that cash. Some cash comes from the company and some comes from the people that shorted stock.

What happens if a company dividends out shares in a private subsidiary and it is impossible for the short to get those shares?

The answer is that they don't deliver. The beneficial shareholder can sue for breach of contract, but if the seller has no assets, then it's "tough luck". In the past, the SEC has told the brokerages to just give the customer his or her original investment back because the shares are phantom.

I think the same thing can happen with derivatives. For example, if I ask for delivery on a silver and gold contract and they don't deliver, what happens? Nothing illegal has transpired. All I can do is sue for breach of contract.

They should go into the market, buy the gold and silver to deliver to me and drive up the prices, but what happens if they just don't deliver or offer a new derivative contract?

The banking system knows they can keep prices from rising by refusing to get pushed into a "short squeeze" on gold or silver.

Posted by: steve at March 14, 2004 12:29 AM

E) Money supply

I think the US money supply may be bigger than officially acknowledged.

There are rumours that:

- the CIA on occassion has the Bureau of Engraving print bills with unauthorized serial numbers without going through the Federal Reserve. This cash can be used to finance operations.

- the US Federal Reserve and the president operate a "plunge protection team" which wires imaginary money into offshore brokerages to buy unlimited amounts of stock whenever it looks like the stock market is going to crash and plunge the world into a depression


Posted by: steve at March 14, 2004 12:34 AM

Reply to:
Usury, killer of men and cities
- Greek Epigram


Posted by: INFINITE RETRY at March 13, 2004 01:40 PM

The reply:
Read this short web page. http://www.alzimach.net/print.php?sid=71 We have been borrowing from the central bank hence our debt. It is unpayable. The Isle of Guernsey has an interesting history. An English protectorate they make their own laws and control their own currency. They don't have a central bank and they don't borrow debt at usury. The government occasionally prints money and spends it into the economy on public projects. There is a flat 20% tax rate. People there are prosperous. They have no debt. They have little if any inflation. Last I heard they were considering going Euro. I hope they avoid that.

If our monetary philosoply is not that of the First Money Act of 1792, and not the Constitution, then it should at least be that of Guernsey, debt free. Not what we have with this central bank that has us in the jaws of a vise.

See the link.

The book "the guernsey experiment" can be found on abebooks.com

Posted by: The Guernsey Experiment at March 14, 2004 01:32 AM

Here is another guernsey experiment link. Consider this strongly. There are many individuals advocating a "fair tax" on the freerepublic.com threads.

What we need before a "fair tax" movement is a "fair currency" movement. The tax can never be fair when the currency itself is bankers and usurers' currency.

http://www.mail-archive.com/ctrl@listserv.aol.com/msg110264.html

Posted by: Promote the "fair currency" movement at March 14, 2004 02:03 AM

The information on this little message board is quite amazing. I read all of these and almost all of them make sense.

What really peaves me is that "friends of the FED" are the biggest insider traders. They know when the FED will prop up the market or take it lower and they take a little piece out of the middle for their offshore accounts. Do this with billions of dollars a few times a year is not a bad profit. The people who opened the private corporation known as the Federal Reserve probably started out with good intentions, then seen how easy the lemmings (ma's and pa's) could be fleased and just couldn't resist.

Last, I most people tend to forget, the Government works for us, not we work for the Government. We have to think of a way to get the people back together, to rule the Government, dictate what we want as a majority power. With the internet, this should be easy. We vote, instead of congress - online voting is the future.

Posted by: Steve Ballan at March 14, 2004 02:44 AM

Wonder what debt free Guernsey currency looks like. Click on the cameras once in the site (it is slow to load so be patient). I observe that both express promises to pay on demand making them valid notes. Federal Reserve Notes lack this essential quality of a note as they do not promise to pay anything ever, therefore FRNs are not really notes at all.

http://www.kcshop.com/foreigncurrency/GuernseyCurrency.htm

Posted by: guernsey currency pics at March 14, 2004 04:51 AM

I'm five years from retirement with a home that's worth 250,000 on which we owe 108,000. Should we sell it short and move into an apartment?

Posted by: messianicdruid at March 14, 2004 06:46 AM

In order for JPMC and Citi to run up absolutely massive derivative positions they must be in receipt of knowledge that ensures their success, it's just commonsense.

Researching the history and inception of the Fed shows that the current owners/controllers of these two above-mentioned banks in particular are direct descendents of the originators of the Fed - and therefore still significantly benefit for their ownership in the Fed system - but indirectly from insider knowledge - not by direct profit from the Fed's activities.

With the inside knowledge they have had over 100 years (well 91 years) they have managed to parlay their considerable fortunes from banking, railroads, oil, chemicals, drugs and weapons, in to a construct capable of global domination - possibly for the first time in human history. So while we fret over taxation, the constitution, civil liberties, WTO, NAFTA and gun control (opium of the masses along with TV, etc, etc.) the real issue is the emerging elite global government and what to do about it.

Corporativism is upon in a massive way and yet we have no way to even expose it adequately to the masses for them to begin to react to the implications of where this is taking us. When you add in to the equation diminishing oil and other natural resources, coupled with global instability with the environment and eco-system in general - - I think a radical picture emerges that we are collectively completely unready to deal with. Solutions for these problems are so far from being conceived due the collective apathy, denial and ignorance of everyone below the elite.

R

Posted by: Rich at March 14, 2004 08:42 AM

Does anyone out there remember how to garden,
raise small animals, collect rain water,
deliver a baby? With money shortages come food,
formula, medicine, soap and hygiene product
shortages: followed by malnutrition, cold,
lack of warm clothing: followed by illness. All
you have to do is look at the homeless. If there
really is a meltdown, you probably will have
little or no money or not be able to access it.
Do you know how to jump start a garden, even
if you live in a city? Did you know you can grow
a garden on cement? Look up permaculture on the
web and start reading .

Posted by: Penny K at March 15, 2004 03:18 AM

Now that we have heard lots of feedback and comments on what can/will happen and what's going on. Let's start looking at:

1) Timing of when things will fall apart (shortly after this years election?);

2) How can we protect our selves financially;

3) How can we profit;

4) How can we protect our emotions and not get cauhgt up in the turmoil.


I am looking forward to hearing your constructive feedback.
Dave.

Posted by: Dave at March 15, 2004 10:38 AM

I would imagine that things could fall apart at any time, and they won't necessarily wait for the election. It has become common wisdom that the market will hold up until after the election. Since everyone "knows" this, it is likely to be wrong.

If the banks are in control of everything, they've got the election rigged as well. Both the candidates are Bonesmen, as this site has pointed out: http://www.depression2.tv/chronicles/skulls.html

The market looks like it is breaking down already. I am currently short the market. I lean toward's Prechter's perspective on gold. In a deflationary environment, everything sinks including gold. Why?

As noted above, the banks own everything, and people owe the banks ... what? "Money" -- specifically, cash. People intrinsically feel the need to make good on their debts, and they need cash to do this. In order to raise cash, they sell, and they sell anything they have: Stocks, house, car, jewelry, precious metals. This feeds the deflationary cycle. The social stigma of bankruptcy is still great enough that the average man will sell his gold to pay his debt. By "average," I mean the kind of people who don't frequent sites like these. While all the gold bugs and deep market thinkers may be tuned in to the realities of the corrupt system, the avergage consumer doesn't think very long or hard about money, gold and the nature of value.

As for keeping your head, and not getting caught up. That will be the tough part. It is hard not to jump to conclusions. Look at what happened in Spain -- the sitting government blamed the Basque sepratists for the train bombings to try to save their ass in the election. The people voted them out of office because it seems clear that the bombings were the work of Al Qaeda. But who's to say that it wasn't the opposition party that did it to capitalize on fear and get themselves voted in?

The point is that when things like that, and of course 9-11 happen, people allow their emotions to take over, jump to conclusions and then make hasty decisions.

Just knowing that things are going to get ugly will help you deal when they do. Be prepared, and do a lot of praying.

Posted by: Jim at March 15, 2004 02:45 PM

ONLY $50 BILLION GOLD


There are approximately $11 trillion in currency around the world and about $50 billion available gold bullion. I would say the odds are that an Asian country or mid east sheik will scoop this up on any fear of economic fallout. Gold prices will hold or move higher, not lower.

Posted by: Steve Ballan at March 16, 2004 12:11 AM

OK ... So let's be serious about deflation.
I realize I m in the minority on this website, since I believe in government, big government, the reason of the failure about to come lying as I believe not so much in central bankers ... but in the very idea of letting stock markets free rein...

What will happen then if Stocks are about to get divided by 2 to 5 (depending of previsions), housing by around 2 ... The ratio of assets to debt ... Moving to ???

My main concern still lies with the dollar.

Since the end of the 2nd world war, international trade has been up. Allways. Since the dollar is used a lot in international trade, this has meant a steady growth of the demand for dollars.

What if with deflation and recession, and protectionnist behaviors ... international trade falls ?

And if foreigners fear a massive fall of the dollar, and sell, fast, all they have, especially the stocks they piled up when defending their currency...

What then ?

What if commodities start to be labeled in other currencies ?

It would still weaken the dollar.

This may correct deflation in the US with inflation of imported goods ... but this may not be enough if the need for capital in the US pushes for higher interest rates...


All in all... Yes we'd better learn how to grow vegetables, produce electricity ... Reinvest politics especially at the local level ...

The good news is : the green revolution is underway. It'll rely on networks of friendship, free flow of knowledge


Posted by: Dubreuil at March 16, 2004 12:40 AM

Problems:

1.Interest – exponential growth leads to disaster

2.Fractional reserve banking – an alchemists dream assets conjured up out of nowhere

3.“full faith and credit of the US government” – makes US citizens and their assets collateral for US treasuries

4.mortgage – means death pledge...

5.debt – severely limits freedom...

Apart from this and “a few” more issues... (like oil, etc.) it can be a bright future...

Posted by: Vau123 at March 16, 2004 07:31 AM

What ever it is that is going to happen be rest assured that it will be bad !! It will probably begin with the next staged terrorist attack and the events that will follow will be blamed on terrorism rather than the true reality of the massive corruption and scandals that are at the root of this entire mess.

I find it peculiar the the central banks are presently selling of more of there gold reserves when in fact gold most likely is the only thing that will hold any value in a crash situation. I am curious to know as to who's, who, in the elite circles that are presently buying the gold that the central banks are now selling ? After all, these people who are controlling the seen have to have some way to protect there present day fortunes so they can buy up all the stocks, real estate, companies et. that will be worth pennies on the dollar in a crash situation.

Cant you see everyone, this semi controlled collapse is all part of the master plan to steel all the wealth. These people that are in control are all Psychotic Sociopaths that just don't have enough money and power to quench there sick, perverted soles !

I suggest that you all by gold bullion, not certificates. With all of the uncertainty your chances of having something left are much greater if you have some gold than with the present day fiat money, What ever you have in the stock market, real-estate, savings and so on, kiss good by on the day of reckoning !

Rockman

Posted by: Rockman at March 16, 2004 08:01 AM

By all means creating fiat money is a good thing. We just need more of it. LOt's of inflation. "euthanasy of the rentier"
THere's too much debt. Let's wash it in a wave of inflation.

This is part the begining of a new kondratief circle. Now we have deflation crisis. Then we'll have inflation growth. THen stagflation. ANd press restart.

Posted by: Dubreuil at March 16, 2004 05:09 PM

In response to Dirk: Robert Rubin's book "In an Uncertain World" is just an attempt by Rubin to write his own version of history. It is basically a memoir starting from his beginnings in risk arbitrage to his days with Clinton whom he defends.

Interestingly, Rubin, Lawrence Sumner (deputy or assistant sec of treasury), and Greenspan used to meet for breakfast on Monday's pretty regularly.

If you believe the gold manipulation rumors, and are familiar with Sumner's paper "Gibsons Paradox" about gold and interest rates, then the meetings take on an interesting significance.

Posted by: sam at March 16, 2004 11:20 PM

Well, after all is said and done, someone tell me: When will we see real estate crash in CA? Seem like real estate prices move up $3 for every dollar I can save and believe me, I do save quite a bit. Am I fighting a losing battle or what?

Posted by: Danny at March 17, 2004 02:27 AM

IMHO...

Move out of California and move to a cheaper state. I know of some people moving to Oklahoma from the LA area for example.

There are other undervalued states like Texas, where you can get a 2,000 sf house for $150k. The unemployment is a little above average but then again, it depends on the metro. It can be humid in Texas too...

Then there is Nebraska & Indiana, where homes are also cheap but the unemployment is also below US average. I have an Attorney friend in Indianapolis who told me to move there because I could get a 1,500sf house for $60k-$110k last year. Indianapolis & Omaha are also relatively low when it comes to crime too as far as I've read. The same house in Minneapolis /St. Paul in a comparable neighborhood would be around $300-$350k.

In addition, in Minnesota you have to heat your house for almost 6 months out of the year and the maintenance costs are also high (weathering due to extreme cold temps in Winter and humid insect infested Summer). I haven't even mentioned the biting flies that are present during Summer...esp. around those "lakes"

In Minnesota, cars rust easily (salt & gravel on the road) and get poor gas mileage during winter, wood rots, paints peel only after a few years, frequent roof replacement, EXPENSIVE college education (2x compared to other states on average), expensive groceries, expense of winter clothing, 40 year old pot hole ridden highway system...if you add all of those up, its just as expensive as California.

In my opinion, there is no advantage but rather a disadvantage in moving to Minnesota. I do plan to move out of here as soon as I can and relocate to a warmer and less expensive metro. You can check out the facts...its all for everyone to see on the net.

Just my two cents....

Posted by: John at March 18, 2004 10:36 PM

In case anyone is interested: check out the

Constitution Party

http://www.constitutionparty.com

They are for small govt - sounds like some on this board would agree with portions if not most of their platform. I am getting involved with the CP in my state - only way I can see to change the power structure in place now with the Dems and Repubs (of which I used to be one).

Posted by: porkyhead at March 19, 2004 03:07 AM

Much ado about nothing! Japan survived deflation for the past 14 yrs.
Fed basically has replaced real gold with paper gold(dollars),when in demand they mine(print).
The whole system is based on paper. When the USA took over economic prowess from UK(turn of the century), Britain survived but the currency lost value.
It will be the same with China/Asia replacing USA.
The country & its people will be fine but the currency will loose value( & that in itself is no big deal...it will make real assets more expensive, thats all). People will still need to buy shelter, transport & food. Services will be needed, skills will be in demand..as long as the education system & health care is provided, nothing will fall apart. Americans as well as the rest of the west have the best system out...Captalism with a social safety net(unlike the 30's). We will do just fine.
There are too many "chicken littles" out there & they have been on the wrong side for too long!

Posted by: banzai at March 19, 2004 02:38 PM

I find it curious that after B Of A is hit with a 625 million dollar fine it is merged with Fleet Bank. It's involvement with the Parmalat and the ensuing scandal is very troubling and BofA has had other major problems with the identity theft of several of its customers. What is going on here is pure speculation but a banking failures will be hid (IMHO) by shotgun weddings between big banks, one that was in trouble the other relatively strong. A major banking failure would bring the US financial system. Derivatives, fraud and a deliberate lack of due diligence is becoming increasingly troublesome in Banking and the financial system in general. Look for more trouble in banking. Derivatives, foreclosures, personal bankruptcies and yes, big corporate bankruptcies that will come will cause significant problems for the big banks.

Posted by: Mark Watson at March 20, 2004 11:53 PM

There is a flakey site that is claiming that on the week of March 22nd (3/22 = 322, the number of the skull and bones) a new US currency will be issued that is backed by gold. There would be accompanying debt forgiveness and old currency would be exchanged for the new.

The site seems a bit wacky (http://nesara.us/pages/home.html), but could there be anything behind it? Sometimes a disinformation tactic is to associate something kooky to discredit something real.

There's another site operated by someone else that refers to the same concept:

http://nesara.org/main/index.htm

If the goal is a new world order, it makes sense that a new global currency agreement is established. A new world currency system backed by gold, accompanied by debt forgiveness by the banking system would avert a depression.

Coincidently, there is a huge new rule coming into effect on April 1st which could begin to unwind naked short positions in securities.

It is thought that this could be a $100 billion problem that the brokerage industry will have to cover.

http://www.prweb.com/releases/2004/2/prweb105961.php

Check back through this thread for my comments on how the clearing system is "broken" and your votes in many stocks you own are not voted.


Posted by: steve at March 21, 2004 12:18 PM

The first mover ?

So what will strike first ? Deflation by debt ? Or inflation by energy ?

If oil prices go up. How do you label it : inflation by cost, leading to lower real interest rates and debt burden ? Or "tax" on revenues leading to reduced spending higher debt burden ?

ANd what about papy boom : the baby boomers leaving the workforce for retirement.

WOuld not it have a deflationnary impact ? (As they get a smaller revenue from retirement, as companies reduce the wages of those who replace them, as wage earners get taxed more in order to pay the pensions, as those holding stock plans sell their stocks ...)

Posted by: dubreuil at March 22, 2004 03:32 PM

Do you think the depression will be global or might it be mostly restricted to the US? The currency can be devalued to get out of the debt crisis as the world switches to another global currency (Euro, gold, etc.).

In that case, the US standard of living would fall, but it may not affect other countries as much.

It would hurt exporting economies, but it might not cripple them as they can export to each other when the US radically reduces imports.

Some of our business partners in China, India and Taiwan say their economies are booming and that internal demand is increasing as consumers get more spending power.

I'm also hearing rumours that the Yuan Reminbi (sp?) may be backed by gold in the future. I have a friend who has the rights to a gold mine in NW China and he says the Chinese are accumulating gold.

Also, there is talk that oil is already being priced in Euros.

This could explain the US invasions of oil producing regions (West Africa, Middle East, destabilizing Venezuala, etc.).

Oil is the one commodity that the US has to import. Otherwise they could devalue their way out of the current mess.

Posted by: steve at March 23, 2004 04:37 AM

Banzai,

You forget one very important thing - The debt load of the average America today. People didn't have credit cards in Britian turn of the century and that "transition" lead to WWI and WWII. Japan is a nation of savers vs. spenders. If they were in hock like their US conterparts today a collapse would have happened. Instead their Govt steals that savings thru depreciating it's currency.

Here there is no savings to steal so we try to create "savings" with a housing boom and extremely overvalued stock market. If both of these markets would simply fall to average valuation the US consumer would be wiped -out. Most people today live paycheck to paycheck. We have massive deflationary forces on labor due to overcapacity of the global labor force. We have inflation in "cost of living" items - food, energy, healthcare. The result is "squeezeflation". The net CPI number looks tame enough, but the components of that index is deadly.

Americans do not want to give up their standard of living and have and will continue to use their credit cards and home equity lines to maintain it. We cannot handle the truth. We think we are rich but we really are poor. Debt helps us temporarily escape that reality. We have not only hocked our own wealth but the wealth of future generations. We are also selling out our freedoms by accepting more and more government "help" into our lives and selling our children down the river. Eventually the pile of debt to the sky will implode and cause much hardship. Don't kid yourself, this will end badly.

Posted by: FoundingFathers at March 23, 2004 01:17 PM

Hey, man, this chart's cool. I dig the colors. I think it would look better on some Acid, though. Maybe snow......I mean send it to Snow. Maybe he's got an explanation for why Citi's going up. Hey, it's a great company. Almost bought some at 23 but Rich Lancaster told me it was a loser. Yeah........you can take that to the bank.

Posted by: Jeff Kassel at March 23, 2004 02:01 PM

Devaluation may help.
But
1 Where would the US get the investment in government bonds if devaluation is felt as massive, inevitable and enduring

2 This may end up in the US wealth being held mostly by foreigners

3 and most important, devaluation helps only with debt facing the rest of the world.
But this is not the main problem.
The main problem is this :
Inequalities have risen. And interest rates have lowered. The typical wage earner has borrowed. So has the overleveraged corporate company, seeking global size by a buying frenzy ...
So you have more debt, based on overevaluated assets ...
The default payment situation will not only be a problem of US versus the world.

And to answer to one question on that subject this is why deflation will be global. Debt has risen everywhere.

Posted by: Dubreuil at March 23, 2004 10:30 PM

And just one comment I'm surprised many recent posts talk about inflation and in alarmist terms.
Remember : Inflation if it can wipe out the debt amounts is good. very good.

My fear though is that inflation if any in price ... Will not turn into wage inflation ... And there fore will be short term... Speeding only deflation by default payment of the debt accumulated.

Posted by: Dubreuil at March 23, 2004 10:38 PM

Dubreil,

I believe that you have touched on the essence of the debate between the bears. What I've seen are two types of bears. In one camp are people like George Ure of Urban Survival who think that hyperinflation is in our immediate future. In another camp are people like Bob Prechter that think that deflation is in our immediate future.

I think we've reached a tipping point where it could go either way but is much more likely to result in deflation in the immediate future. (I'm a deflationist). All the world's debt, especially the US consumer's debt, is denomiated in dollars. When things really start going badly I believe people will sell everything they've got to raise cash to pay off the debt. That will result in a tremendous run on the dollar. There won't be nearly enough of them. This is not a good situation but is much better than the hyperinflationary outcome where I could imagine an extremely stubborn Fed that utterly refuses to accept a deflationary outcome and runs the printing press so hard that while our deflationary episode would still come first, it would then segway into hyperinflation as the Fed's printing goes out of control.

In the deflationary outcome people who were conservative savers of dollars will win as their dollars would become much more valuable. In the hyperinflationary outcome no one wins except people who have lots of gold and silver and real estate. (and they don't even win by that much). I think that we will see deflation first but it may be followed by a burst of hyperinflation. At the point between the two stages I plan on trying to time the transition from holding cash to buying silver and gold (and maybe real estate) if I survive financially through the deflationary stage.

Most bears I find are looking at inflation as the big scary thing. I think they are focusing too much on the recent history of the 1970's. In the beginning this thing will look more like the 1930's. However, as Mark Twain once said, "history doesn't necessarily repeat itself...but it often rhymes." Those people looking at only the '30s or only the '70s are ignoring that basic fact. It seems to me that maybe in the beginning of the 1930's we may have been in better financial shape than we are today. We produced more of our own things. A lot of our debt was internal. Now a lot of our debt is internal. I can't help but think of Germany in the 1920's as they went through their bout of hyperinflation. They owed massive war reparations to Britain and France.

The deflationary forces at work today are powerful. I think they will win the day in the intermediate term. After that the fundamentals of US currency and debt stance are scary stuff.

Kondratieff discovered that capitalist financial systems last about 60 years. I think that while we may witness the end of the current incarnation of this financial system another will be born out of the ashes. At the beginning of a new financial system the key is to try and figure out what the basis of that new system will be. Will the world go back to the gold standard? Maybe...I think will find out in the next 10 years.

Posted by: Michael at March 24, 2004 04:01 AM

"Now a lot of our debt is internal."

I meant to say external of course...and by our I mean U.S. debt.

Posted by: Michael at March 24, 2004 04:05 AM

Our currency can be easily replaced by a new one. This scenario is easy to see in hyperinflation, like Germany 1923. If deflation is in the cards, we probably keep the same money.

According to Austrian school, inflation occurs when the printing presses roll; price increases are an effect. Are the presses rolling? You betchum! And worldwide too. It is a race to devalue, to improve trading position.

Economic catastrophy is comming, we just don't know when and how. You can bet that we, us goldbugs will be part of the blame. Bush's gang like to blame others for their errors. That's how we got to Iraq.

Outspoken goldbugs will become terrorist.

Cost Ricco looks better all the time.

Posted by: Anybody but a bush at March 24, 2004 05:29 AM

The brokerage industry is exposed to billions of potential losses.

http://www.investigatethesec.com/MediaLinks.html

Posted by: steve at March 25, 2004 07:32 AM

Hey Steve.

I think that the definition of "financial terrorism" is unregulated derivatives in the trillions own by a handful of major banks.

These guys have (at minimum) indirect control of the global financial system as they are able to threaten Total Global Financial Destruction if they are not kept "whole."

By allowing financial institutions to securitize the entire human populations debt in to derivatives and then sell them on the world's governing institutions have provided the banks with the ultimate authority to dictate future events.

What these banks are now prepared to do to maintain thier pre-eminence in a world where the population can't comprehend what on earth is going on and why, is what we are about to learn! Now that is the definition of financial terrorism to me. The people sit in fear of an enemy they can't see or even understand who in turn sits on top of Financial Weapons of Wealth Destruction (or should I say Redistribution).

Cheers Rich

Posted by: Rich at March 25, 2004 10:46 PM

Greetings!

I've noticed many who are trying to find a word that might describe an economy that is undergoing inflation and deflation at the same time. my modest suggestion...

Simulflation

dave

Posted by: Dave Gobel at March 26, 2004 12:12 AM

Go to Barnes & Noble's investment books section. Pickup the first book on precious metals investments. Wait, there isn't any in plain sight. Well, there must be one here. Actually, there doesn't appear to be any books on investing in precious metals! Hmmmmm......

Posted by: Bill at March 26, 2004 12:39 AM

You don't need to go to Barnes & Noble, just turn on CNN headline news and wait for a commercial. There are all sorts of companies like Monex who are spending a lot of money on advertisements to get you to invest in Gold. I look at this as a contrarian indicator that gold and silver will go down in the near term as described by Bob Prechter in Conquer the Crash. It is clear that there is a great deal of bullishness out there when it comes to the gold market right now...these commercials are part of that psychological profile.

That being said I do believe that it is wise to hold some quantity of gold and silver as I expect to see hyperinflation after our deflationary episode.

Posted by: Michael at March 26, 2004 02:08 AM

Funny, I've never heard of anyone using ads as a "contrarian indicator" before...also surprised to hear that there is a great deal of gold bullishness out there. I wonder what percentage of American investors own gold, except as jewelry?

Harry Schultz coined the term "stagflation", but that's old now...maybe a new word is in order.

Posted by: Brooker at March 26, 2004 05:49 AM

I've been mulling over scenarios...

The US's problem is that it imports more than it exports and it has too much debt. Obviously, the fix is raising exports, lowering imports and raising interest rates to reduce borrowing.

All money is created by borrowing, so reducing borrowing reduces the money supply. There is less cash to go around which should increase the value of a dollar. Unfortunately, a corresponding drop in the exchange rate will reduce the value of the dollar.

The world's problem is that the US is "too big to fail".

If they allow the US dollar to fall to half it's current level over two years, that will definitely discourage imports. This will encourage buying domestically. The only thing the US really needs to import is oil and gas.

I think the goal of endless wars for oil will ensure oil is priced in US dollars. I expect another fake terrorist incident before the election and the draft in 2005. After all, war is the great consumer. If they rebuild Iraq, then Iraq needs to import from the US.

This makes me lean towards deflation. Foreign bond holders will find the value of their debt cut in half and will demand higher interest rates on new debt. Higher interest rates will cause people to want to save money and pay off debt, which will reduce the money supply.

This will make houses and stocks go down, but stocks will seem to stay the same. The reason is that if the US dollar is worth half as much, then all else being equal, stocks priced in US dollars should double.

The asset bubble that will pop first is more likely to be real estate than stocks, IMO.

The effect for the US consumer:

- their income has been effectively cut in half, but the cost of housing may have fallen to compensate

- demand for US exports has increased, lowering unemployment

- there have been massive bankruptcies, which are good, because they purge the problem.

- the banking guys win, because the hundreds of billions they've been naked shorting companies can be repaid with $.50 dollars.

Comments?

Posted by: at March 27, 2004 12:38 AM

You probably remember during the boom years alot of doomsayers were saying what 'should happen' in the economy as huge imbalances persisted (high labor costs, sky high stock prices, trade imbalances, etc.). Well, it took awhile for some of the things that 'should happen' to actually happen. And many have not, or are postponed I suppose.

What's my point? Economists will tell us what should happen. But half of what should happen will likely not.

With large oil supplies secured to be priced in dollars and food exports stopped because of 'international policy' (OK, we have mad cow, genetic modified, so food inflation will be capped as we don't have to compete for U.S. made food with the rest of the world), inflation is capped. Or perhaps, postponed.

With the dollar sliding down slowly and average US wages sliding down slowly, we'll actually have competitive wages in the US again. And foreign countries will have higher wages. So outsourcing will likely subside.

China's bubble is about to pop. Next year at this time, all the commodity prices will be lower and declining. China will be another Argentina, who also pegged their currency to the dollar in the past before their big blow-up. China has not have a bursted bubble in the recent past to know how to handle it, and will likely handle it poorly. The U.S. economy will benefit.

Posted by: Bill at March 27, 2004 05:58 AM

the market should have collapsed many many months ago...pretend for a moment that it was 12pm and you were with a group of friends at a bar having the time of your life but you all ran out of ready cash and the laughter subsided and there was that awkward silence until someone broke out the "platinum" card and ordered up another round for everyone- " to hell with tomorrow and the hangover that goes with it anyway..."
The fed has doubled the # of printerpress fiat bucks available in the last few years and put it over the top by starting to offer it out for loan for almost free. That's currency at a reduced intrinsic value that turns into a reduced real value at a "trickle down" pace. In 6-12 months from now when you get the bill that's associated with everything you "do need" versus the crap that you "don't need" ( cheap imported goods ) - you'll find that all that printing and low interest "value" that your assets have risen by might well be invisible and non-existant because your core expenses are going to rise by ?%-probably the: percentage that the dollar has fallen by and you'll find your wages have stayed the same while you've been required to boost your productivity by a similar amount.

Posted by: chris at March 27, 2004 11:51 AM

hyperinflation cleans the debt of all those who made poor investments or spent too much. There's nothing better if you want a clean start after that. It's the best way to redistribute cash from those who have to those who owe.

In deflation, which will strike first, debt goes than the hardway through bankrupties.
Then come hyperinflation (possibly) debt goes down through negative real interest rates.

There's a good point in saying lower dollar will mean steady stock levels.
I think someone ought to follow on that point and tell us what have been the real value of stocks ...
I mean dollar has plunddged already 20% while stocks remain below 2000 level... It means stock are still in real level (power of purchase parity) much lower ...

Let's watch the employment figures of this month. I guess they will tell a lot on the mood of the markets.
My bet is deflation through unemployment, lower wages and higher oil and commodity prices ... lower dollar will follow and take some time before it leads to higher exports. Expect more enron like failures. Confidence crisis...

Posted by: dubreuil at March 27, 2004 11:15 PM

I think there will be an asset devaluation as expressed by a neutral currency such as gold, but expressed in US dollars, the assets may maintain value.

Stocks could fall in half in real terms, but if the US dollar also loses half its value, the stock price will remain the same.

The same applies to housing.

A steady, planned, two year decline in the US dollar would help fix this mess.

Also, there has been a lot of talk about peak oil, but people forget that there are renewable alternatives such as ethanol, which although more expensive, will supply energy in the future.

http://running_on_alcohol.tripod.com/ethanolfuel/id7.html

When China joined the WTO, they were given seven years to become full members. That must be coming soon. One of the conditions is that they must let their currency float.

I predict China lets their currency float and backs it with gold. At the same time, they could flood the market with US dollars while demanding repayment of their debt. That scenario could be ugly.

Posted by: steve at March 30, 2004 02:39 AM

Rejoice

The way I see it, the coming crash will open the way to a more decentralised, localised economy ... Network and information based. With little transportation because of energy costs.

Selfish homo oeconomicus is out. Welcome the new cooperative man with feminine values...
Out materialism. Welcome new spirituality. Welcome ecology.

We've had Japan and germany as models in the 80's The US in the 50's 60's and the 90's again ...

Who's next ? India ? Sweden ? Italy ?

Next move :
Bankrupt USA ask the UNO to take over the control of it's armed forces ... :-)(or part of it)

It may have you smile, but frankly what choices do we have ?
Economic disintegration, new protectionism and probably wars ...
Or more political integration.
And if history is to repeat itself ...
Both. In that order.

Posted by: Dubreuil at March 31, 2004 01:44 AM

>decentralised, localised economy
Fine. In fact, the most secure careers are serving your immediate community vs global business concerns.

> cooperative man with feminine values...
Gross. We need real men that roll-up their sleeves and do real work. Women need to be taken care of so they drop their careerist, competitive additudes.

> Bankrupt USA ask the UNO to take over the > control of it's armed forces ...
Wow, look at the record of the UN, IMF, etc... wars, genecide, economic depressions

>It may have you smile, but frankly what choices do we have ?
How about being American?

Global government does not care about you. They fear you and want to control you. You are not part of the 'global community'. You are just agreeing to submit to global tyranny.

Posted by: Bill at April 1, 2004 02:17 AM

http://www.prweb.com/releases/2003/12/prweb92210.htm

Posted by: steve at April 1, 2004 06:26 AM

It will be similar to the Japan decline.

Why do I say this?

It already is similar to the Japan decline of the last decade.

A crash does not fit into the plans of the folks in charge.

Yes, unwinding debt etc. is necessary. They will allow asset bubbles to deflate slowly while they fight deflation tooth and nail.

Deflation is too serious. Despite article after article ad nauseum by the survivalists it really won't be that bad. 1929 was deflation on a massive scale. (I know, my family was wiped out) It was different, though. The currency was backed by something. The boys didn't have the juice they have now.

Yes, if you have debt and lose your job you have a problem. If this EVER happens you have a problem. The problem is resolved by bankruptcy. You end up losing some of your STUFF...Horrors!

Don't let me discourage the move to Montana with 20 years worth of spam and ammo crowd...fresh air is good for you and we need all the healthy people we can get into the health insurance pool.

But, the great deep dark mucky mucks are determined to keep this as an inflationary episode in our history. The mucky mucks gotta lot of juice and they will get their way. The aliens always get their way, boys...after all..they can fly.

Now if you're going to hand me the deflationary rap...fire away. I don't buy it because WE HAVE MASSIVE COMMODITY INFLATION NOW. Noticed? No? Copper could be had for .68 a pound in October '03....how about 1.36lb now? Steel, platinum...etc.

The buck ain't buyin what it used to...but the guys who have their hand on the switch will keep our economy from the spamfesters.

It doesn't benefit the trilateral commission to have worldwide economic disasters...all of the household staff gets so fussy when they are starving.

Best to all.

Posted by: Tstorey at April 1, 2004 12:10 PM

I don't buy the inflation scrap because I can't see wages moving.
If commodities go up and wages stand still ... All this leads to is lower spending on other goods ... That means deflation in the non oil exporting countries.
The only way you can create money is by lending more money. If people stop borrowing, and lenders stop lending ... You just cannot create cash.
Pour in as many central dollars as you might want. It's useless. If in the mean time people stop borrowing, if commercial bank created money falls ...
IT falls.
I believe in one good ratio : the ratio of debt to revenue, debt to revenue for an individual, debt to GDP for a country. That ratio is up.

look at it. Real interest rates go up : it scares those who owe money. They won't borrow anymore. Fall of spending .. So on.
Real interest rates become negative (trough inflation) scares the lenders, they fear higher interest rates in the future, they sell obligations and have the rates move up.

How long can real interest rates remain just a little over 0 ?

And about the military. Frankly : how long will the US be able to afford it's military forces. IT now spends more for it than the rest of the world does for all their armed forces ?
There's only 3 ways out :
reduce the armed forces
Sell them to the UNO
Wage wars to make money out of it.

Finally. Women have always rolled their sleeves and done the real work. They would get the fruits and vegetables, take care of children ... 80% Of the food and work involved. Men would parade, get some meat, do all the things that come over what is necessary.
Feminine values ... Just less selfish behavior, less grab the money and leave... more commitment.

Posted by: Dubreuil at April 1, 2004 06:07 PM

"Want to educate yourself?

The History of Business Depressions
Otto C. Lightner
c1921"

Interesting. I think I'll check that out. Can any one recommend a GOOD book about the depression in America in the 1930's specifically? I've heard of the John Kenneth Galbraith book about the 1929 stock market crash but does that book talk about the depression (which started in 1932...I agree with the poster that made a distinction between 1929 and 1932. The really bad stuff didn't start until late 1931 from what I've read.) that followed the crash?

Posted by: Michael at April 2, 2004 03:54 AM

It isn't quite true to say the only way you can create money is to borrow it.

That's how it works now - the bankers create it out of thin air and the government borrows it and pays interest.

There's nothing to stop the US Mint from printing it directly. I have a Kennedy "US Silver Note" which was issued directly by the mint.

Instead of "US Federal Reserve", it says "US Mint".


Posted by: steve at April 2, 2004 06:04 AM

According to news reports, US jobs increased by 308,000 in March from the previous month.

At then end of the article, they also cited that the number of Americans taking part time work in March compared to the previous month also increased from 4.4 million to 4.7 million (300,000).

I don't know about you but part time work does not pay living expenses completely.

Posted by: Jon at April 2, 2004 10:37 PM

The article also says hourly wages' growth is under CPI growth ...
We'll have to wait and see ...
But the trends remain the same. THe housing buble has to bust. WHen it does, fewer building will occcur at first, meaning fewer jobs.
The stock bubble has to explode.
Less asset worth will imply less borrowing, less spending, lower prices ...

If you have prices moving up faster than wages + interest rates moving up for fear of inflation ...
Well
I can only read equals depression and deflation by debt.

Posted by: Dubreuil at April 2, 2004 11:10 PM

10 year treasury yield up over 5% in just 1/2 hr of trading. Those carry trades are going to unwind pretty fast now. Those people with adjustable rate mortgages are in for a big shock in the next couple months.

This is getting serious now. There is a sort of electricity in the air. In one sense this is going to be exciting to watch. It is not everyday that you can watch the beginnings of a major bubble burst. Tragic of course but also exciting. It is a highly interesting phenomenon we are watching here. I can't help but to feel simultaneously sad for all the people who will be hurt by this...it is a very mixed emotion to say the least.

Posted by: Michael at April 2, 2004 11:24 PM

Unbelievable...10 year yield now up 6.5% from yesterday
http://finance.yahoo.com/q/bc?s=^TNX&t=5d

I wonder what this does to the derivative positions referred to by Mr. Lancaster at the top of this list. Fannie and Freddie have to be sweating bullets today.

Posted by: Michael at April 3, 2004 01:56 AM

Fed Reserve Board Governor Kohn delivered a speech yesterday (4/1), in PA, and he talked about housing P/E's, consumer debt loads, etc...
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=19977116

Posted by: Susan at April 3, 2004 07:31 AM

I am in the R E field, and I saw a classic ad this morning, in one of the industry periodicals, from a lender. "No Job/No Assets/Bad Credit/Bankruptcy?" The carry trades have no sympathy from me. How about some standards, people! We, the US taxpayer, will no doubt be bailing out Freddie and Fannie, and that just sucks (excuse the word). Last week, I heard an ad on the radio from FEMA,stating that if your out of work, and can't make your house payment, to call them. Pass the Tylenol, please.

Posted by: Susan at April 3, 2004 07:54 AM

interest rate increases:

When 10 yr bond rates jump up quickly, the estimated average length of the life of a mortgage is increased because of lower probability of the mortgage being refi'd. With this number increasing, the value of the average mortgage decreases a bit, making mortgage backed securities (bundles of mortgages) decrease. This drives down the price of new mortgage backed securities, which drives up the rate some more. (which lengthens the life of the average mortgage - go back to step one beginning of this paragraph)

This cycle occurred at the end of last summer. Basically the gap between 10 yr bonds and mortgage rates expands continuously as Wall Street tries to estimate the true value of mortgage backed securities. Eventually the gap stops expanding, but no one knows where or when.

Yesterday's big jump in 10 yr bond rates will likely kick-off another 3-6 weeks of chaos in the mortgage back securities market driving up mortgage rates again with no certainty on what anything is worth regarding to mortgage-backed securities.

Possible gov't intervention could offset this, but last summer no intervention was reported. It was likely to gov't saw us heading into a high GDP growth quarter (8+% growth in Q3) and let some air our of the refi/housing bubble. Is this a pre-sursor to another 'hyper-growth' Q2'04 in US GDP?

Posted by: Bill at April 3, 2004 10:06 PM

Tstorey, Banzai, Dubreuil,
I do not believe that deflation in the U.S. will happen like Japan.

First, Japan has stopped spending and borrowing for all practical purposes.

Second, They still have demand for the products they are producing. It is not in Japan, but in the rest of the world. This demand for Japanese products has kept them from hitting rock bottom. Once this demand dries up then they will feel it.

To take a quote from Robert Prechter:
'Deflation is the contraction of money and credit.'

When the U.S. stops spending and borrowing that's when the world will feel it. So far, spending and borrowing has only stopped in the business sector in the U.S.

The social mood can be seen changing. Look at the commercials on TV. They tell people to get out of debt now, There are seminars, books, and companies that will help. How many of these commercials did you see five years ago?

What happens to the money supply when a loan is paid back? Check a Macroeconomic textbook for this information.

The correlation that should be drawn is the Japanese baby boom. The peak of their baby boom was 1951. The peak in our baby boom generation was 1961. So the stock market crash was almost perfectly timed.

Can anyone predict a depression? I do not think so, I beleive that it will happen like a thief in the night. Even economists cannot predict exactly when they put their socks in the morning until after all of the data for that day is recorded and then wait six months for the report to come out.

Posted by: Roy at April 4, 2004 12:38 AM

I have this question, Considering that:

. the US economy has a total debt of around 35 trillons.
. whenever any debt is payed then money is destroyed.
. Let's assume that this debt is contracted at a rate of interest of say 5% anual.. (just for the exercise ).

This means that the US economy has to take at least 1.75 trillon dollars of new debt per year for the money suply not to contract..

Is this right? Is there anything wrong with my reasoning?

Because if that's so.. I wonder what would happen if say the US consumer and US businesses tire and stop taking new debt.. Then either the US government will go on and assume this level of debt on it's own or the money supply will necesarily contract sending the US into a deflationary spiral..

Please if you find any errors in my reasoning.. then tell me.

Posted by: just question at April 4, 2004 04:16 PM

Just Question,
Your reasoning is correct.

1 - The businesses have slowed their spending. It has been the consumer that has kept the economy going.

2 - The only debt that the US government will assume is its own (treasury bills, bonds, and notes).


Posted by: Roy at April 4, 2004 11:36 PM

Legislation giving regulators the power to take over mortgage giants Fannie Mae and Freddie Mac if they became insolvent narrowly won approval Thursday in a partisan vote by a Senate panel. Prospects for Senate passage appeared dim, however.

The White House had urged such a provision for putting the two government-sponsored companies into receivership, as part of legislation tightening the reins on Fannie Mae and Freddie Mac and creating a new federal regulator to oversee them. The Republican-written bill was adopted by the Senate Banking Committee, 12-9, mostly along party lines.

The debate over receivership was kindled in February when Federal Reserve Chairman Alan Greenspan warned that Fannie Mae and smaller rival Freddie Mac could pose a threat to the U.S. financial system if their ability to assume new debt isn't restrained.

Posted by: steve at April 5, 2004 08:42 AM

In response to this :

. the US economy has a total debt of around 35 trillons.
. whenever any debt is payed then money is destroyed.
. Let's assume that this debt is contracted at a rate of interest of say 5% anual.. (just for the exercise ).

This means that the US economy has to take at least 1.75 trillon dollars of new debt per year for the money suply not to contract..


Could any one help me see things clearer. WHat happens to the dollars held by foreigners (as a reserve for instance). If these foreigners start to sell their dollars : what happens ?
It seems to me it props up the money supply. (For instance they buy US goods labelled in dollars and sell these goods in euros, the US economy ends up with more dollars and less goods ...)

I was wondering : how many dollars are held by foreigners ? Is it in the same range (trillions ?)


And to see the complete truth : does any one know how much new debt is issued in dollars around the world ? (Argentina for instance issued debt in dollars, many companies do so ...)
If foreigners start issuing debt in other currency, then, tell me please if I'm Wrong, this too would reduce the money supply in Dollars within the united states ...

(so that a move out of the dollar would have both a deflationary and inflationary effect, the impact changing if people get rid of dollars first or stop issuing dollar labeled debt)

First guess being : no new debt (wether in dollar or another currency) and then massive sell off of dollars. (inflationary impact, but moderate in comparison)

Posted by: Dubreuil at April 5, 2004 08:15 PM

Here's a list of some great financial message boards and editorials.
Gold Eagle Editorials- Great stuff,daily articles-housing, markets, inflation/deflation
Silicon Investor-Mish's Global Economic Analysis (excellent) & R E Crash message board. Well educated posts on both.
WSJ Property Report message board-Ok, lots of gibberish in with interesting.
Financial Sense- storm watch section-links to articles (some require registration)

Posted by: Susan at April 5, 2004 08:27 PM

Dubreuil:

If a foreigner has US dollars in a mattress, it is almost like they don't count - they have no effect in the USA. They are just bits of paper and ink.

When the dollars are spent, they dilute the spending power of other dollars. It's like there is suddenly more dollars in circulation, which makes them all a little less valuable.

One of the reasons the US is so successful is that it can import goods and pay for them with paper and ink. When the paper and ink comes back demanding real goods, that will make other dollars less valuable.

You've keyed into an important point though. As the US dollar becomes less valuable, it will drive up demand for US exports which is bullish for the economy.

I think it all depends on the rate of change. If the devaluation occurs too quickly, then there is panic.


Posted by: steve at April 6, 2004 11:46 AM

Actually, the government does not only assume it's own debt.

In New England in the 80's realty crunch our government assumed a couple of banks and all debts held by those banks...they set up RTC and set the precedent for why everyone thinks they are going to save them now.

Plunge team? Perfect, all the stock freaks figure the Gov will stop a crash.

Kind of a responsibility vacuum wouldn't you say?

Like a rich uncle with the biggest HP inkjet dollar printer ever.

I still say inflation cuz they have the printer.

I would have to say that the reason my mother's house has tripled in value in the last 9 years would be some kind of inflation.

Milk is expensive...that doesn't count.

Fuel doesn't count because over 25 years it has actually gone down in inflation adjusted dollars.

This is why people have Ford Excursions.

Man! I can't wait to see the ford dealer after dow 5000 and three dollar gas. Those biggies is gonna be cheap.

Best to all.

Posted by: tstorey at April 6, 2004 01:03 PM

Ok foreigners spend their dollars it has an inflationary effect (the money supply within US grows).

My special addition was this.
Each year lots of debts are issued in dollars outside of the US. This create money, some of it is spent within the US, it has an inflationary effect.

Now if foreigners stop issuing debt in dollars, this will add to the deflation.
so about the impact of foreign countries you have two opposing effects :
1
When foreigners stop stock piling dollars and even sell theirs, it props up inflation within US and devaluation of US goods and assets.
This could counter the inevitable deflation by debt originating within the USA.

2
When foreigners move out of dollar labelled debt, it reduces world dollar money supply,and causes deflation.


So my question was simply does any one know the figures involved :
Debt in US dollar within US this we have
Money supply in its different form within US this we have.
Dollars held by foreigners, espy foreign central bank I've seen the figure somewhere ... But Can't remember where.
Dollar labeled debt issued world wide ... This figure I have never seen anywhere... so. If anyone knows it and think it might be interesting to know ... please post it here.

Posted by: Dubreuil at April 6, 2004 07:05 PM

Funny to spend time watching markets ... Confidence high. Rising labor market. Well ... We'll see.

Posted by: Dubreuil at April 7, 2004 09:27 PM

Waiting for this depression is like watching the grass grow. I'm starting to lose interest. Maybe if I stop reading financial news and watching the markets I'll be surprised one day.

Posted by: Michael at April 7, 2004 10:33 PM

Michael,

I have looked at newspapers during the 1930s. I think the worst part for people was around 1937 to 1938. By that time everyone had spent all their savings. Even in a small town newspaper there were pages and pages of properties being sold on the court house steps.

After looking at these newspapers, I think there are two stories. One is of the stock market. The other story of people's lives during that time is much different.

Should things get really bad, you may not be worrying about money, but instead, worrying food.

Gil

Posted by: Gil at April 8, 2004 02:59 AM

Gil,

I fully expect to be worrying about food. I'm just having a hard time getting my mind into that alternate reality before the thing actually happens.

Those newspapers sound very interesting. Where did you look at them...at the library? I took a few books out last spring from the library about the depression. They weren't that good. The newspapers would be what I'm really after I think to get my head around this thing.

Posted by: Michael at April 8, 2004 07:26 AM

The real trick is vigilance.

I've been enthralled in the economic Meltdown theory for some time now.

BUT... it gets stale after a while. You look around and new business are going up, people are busying themselves working, the world is growing... so what is there to worry about? Nothing!

Except the unpredicatable. So I have Water/MRE's/and Silver Rounds.

I have a contingency plan, places to go, people to network with if TSHTF. Other than that all you can do is hope for the best, prepare for the worst.

By doing that, you are never depressed and there is always a little something tucked away for a rainy decade.

Posted by: Sgt. Todd at April 9, 2004 03:44 AM

Michael,

Let me say that history never interested me while I was in high school, but it does now. Part of it is just seeing what went on. Getting the feel of the social mood at that time, is part of it.

When going back to look at the newspapers in October 1929 I found out that there were a series of crashes, not just one. In each case the newspaper articles said that this was just a temperary setback, that the market would recover.

In late November or early December the market did start to recover. It continued until April.

The feeling at that time was that the economy was coming back. At least as far as the stock market was concerned.

Starting in April the market started it's long slide, continuing to the summer of 1932.

Besides the stories, it is interesting to look at the advertising of that time. I was noting ads for Pierce Arrow automobiles, as well as Auburn. Also radio was a big thing. Radios cost as much as $90 dollars. That is equal to about $900 dollars today.

Here, the big library downtown has the older papers on microfilm. They can be asked for by date. They probably are available where you live too.

Gil

Posted by: Gil at April 9, 2004 10:27 AM

food shortages vs energy shortages

In the 30's, the majority of Americans were in agriculture (farming). Today, a small, small percentage of Americans are producing food.

I would suspect last year's blackouts, and California ebergy price spikes of '01, being a taste of what energy shortages will do to America.

May sound trivial, but not if you have a baby in your house.

Anyhow, I've had no TV for 8 years, so how bad could it be for me?

Posted by: Bill at April 9, 2004 11:16 AM

Gil,
The newspaper headlines during the Great Depression fascinate me, since I think we'll pay some heavy consquences for our economic cycle derailment, the bubbles, and our employment issues. Can you share with us, some insights you picked up while reading the old newspapers? You mentioned a disconnect in headlines vs. reality. What about housing? How much hyperbole was there, to give hope that jobs were coming back? Would appreciate it.

Posted by: Laura at April 9, 2004 09:11 PM

Hello Laura,

Well I was flipping through my special filing system on the right side of my desk here. I thought I had a xerox of an article......

Well from memory the headline was something like, "Economy is better than the last 7 years". It went on to say that "cash register receipts have improved from the slow down experenced last fall. We expect improvements as we move into the late spring and summer."

Another article talked about an award being given for the best new building in downtown Dallas.

Both stories came from newspapers in the first part of April, 1930.

My feeling is that people got blind-sided by the economy turning down in the later part of April, and continuing through the summer of 1932.

If I find time, I'll go back and copy a couple of articles and present them here.

Gil

Posted by: Gil at April 11, 2004 11:13 PM

questons wh/ I could use help w/:

if deflationary currents grab control of the USA econ., aren't I correct to assume all paper assets (essentially what stock is) will contract?...

I would assume the hard assets of gold/silver bullion will go up in value b/c of safe harbor, but wouldnt the mining companies paper stock itself go down since its paper fighting much lower demand into the overall stock market?...

lastly, is there anywhere in the stock market to be in a deflationary depression enviroment aside from shorting that will raise in value? ... if not is bullion the only place to go to seek increasing value in an asset?

Thanks & a Happy and Peaceful Easter

Posted by: kelvin kloud at April 12, 2004 01:45 AM

According to Bob Prechter,in deflation everything goes down in value except cash...including gold and silver. Even though gold was illegal to own after 1933 the silver market could be looked at as a proxy for precious metals. From what I've been told silver went down in the 30's from where it was in the late '20's. Short term Tbills are supposed to be the safest harbor during deflation since it is unlikely that the Federal government will default on its debt. However, I believe that after the deflationary episode it will become incresingly more likely that the U.S. govt will default so I plan a two pronged strategy. Mostly cash for the deflation and then afterward shifting into gold, silver and hard assets.

Posted by: Michael at April 13, 2004 11:38 PM

With the oil crash planned ahead, and although a major deflation would impact the demand for oil... I would advise investing into solar and wind electrical systems... water companies, electrical companies are safe havens.

Can anyone explain how the markets can remain so confident with the mess going on in Iraq ? What was so dangerous with the spanish attack (just another one) and is so reassuring with Iraq (situation possibly getting completely out of control)

Besides if the morgan stanley is right the housing bubble is just about to explode.
I wonder

Posted by: Dubreuil at April 14, 2004 12:49 AM

Here are some interesting reads. These are headlines from early April 1930. The general feeling was that things were getting better. In truth, the economy would turn down later in April and continue down till the summer of 1932. These are some headlines and a few lines from articles of that day.

April 2, 1930 -- Determined, aggressive bull continue to force stock market higher.

Price index of 90 leading stocks at new 1930 high.

April 5, 1930 -- Convertible bonds active and higher; Curb market movement irregular.

Stock market bulls go on rampage; cotton breaks badly in last hour. Feverish activity marks deal in stocks as prices advance.

Advertisement:
another great radio offer: 9 tube all-electric radio $97.00 delivered complete and installed. Sear, Roebuck and Co.

April 6, 1930 -- War problems being worked out in Europe. Ratification of young plan by Germany is forward step.

General Tire sales growing. District manager Jones optimistic over outlook for 1930.

April (I didn't note date) 1930 -- Orderly but persistent selling is frature in stock market transactions. Top-heavy stock market is target for attack by bears.

April 10, 1930 -- Bulls in stocks again aggressive; convertible bonds are more active. General level of security prices at new high for year.

April 10, 1930 -- Three Stories added to plan of skyscraper. National Building will have total of thirty-one stories.
Decision to add three stories to plans for the National Building to be erected at Lane and Commerce gives it a total of thirty-one stories. Plan was announced Saturday by T.P. Roberts of Whitson & Roberts, architects. Decision to increase the size was reached after a check up showed that 35 per cent of the space had already been leased.

April 10, 1930 -- Realty Game "looking up". Rental Property demand making market for more sales...... Dallas real estate business is on the road to recovery, with much good business to look forward to. W.H. Kindred said the dearth of good rent property would improve the sales business and advocated efforts to sell property to renters.

New York, April, 10 The stock market was treated to one of the most violent busllish displays in its history in the first half hour of trading today. Although the remainder of the session was somewhat of an anticlimax, favorable industrial developments buttressed the market against heavy profit taking and a renewal of short celling in individual issues.

April 11, 1930 -- Index of ninety stocks at new peak for year 1930.
------
Just a few headlines and parts of articles that I promised earlier.

Gil

Posted by: Gil at April 14, 2004 06:21 AM

THE TEN WORST CRASHES OF THE DJIA OF THE PAST 100 YEARS.

Some of you are interested in Crashes and how they trend, so I did some research and came up with the post below.

Dustin Woodard runs the Mutual Fund area of "About" dotcom - where I found the dates and percentages in this post, so thanks to him for doing the research! I've added some of my own comments to his numbers below.

Here are the Top Ten Crashes of the Modern Era:

10th: Date Started: 9/7/1932 Date Ended: 2/27/1933

None of the crashes of the modern era - starting in 1987 by my definition - make it on to the Top 10 list, which gives you some indication of how painful a really serious crash can be. The 10th worst crash was part and parcel of the Great Depression and the market dipped 37.2% after having been on a Dead Cat Bounce from the lows of the 1929 crash.

9th: Date Started: 11/21/1916 Date Ended: 12/19/1917

This crash was attributable to WW I, and is the first crash after the creation of the Fed in 1913 - the agency was created to end crashes and succeeded for only 3 years. Mind you, Woodrow Wilson was voted in to office because he was supposedly anti-war - but took the US in the war in 1917 anyway.

8th: Date Started: 9/12/1939 Date Ended: 4/28/1942

This crash lasted nearly 3 years during the early part of the war and was the longest of modern times. The drop was 40.4% and was due to the war.

7th: Date Started: 1/11/1973 Date Ended: 12/06/1974

The drop was 45.1% and was created by the closing of the "gold window," the scandal of Watergate and the need to end the Vietnam War. When you compare the seventies with today it seems to me that the 70's was a cake-walk compared to the issues we are facing right now.


6th: Date Started: 6/17/1901 Date Ended: 11/9/1903

Dow Jones Industrial Average records are not available before 1900 so this is the oldest crash on record for this list. The crash erased 46.1% of the markets value and preceded the Panic of 1907.

5th: Date Started: 11/3/1919 Date Ended: 8/24/1921

This was a post World War I boom and was created by the euphoria of victory. The crash followed a run-up of the market of 51% and eventually created a decline of 46.6%.

4th: Date Started: 9/3/1929 - Date Ended: 11/13/1929

This is the crash that officially started the period now known as The Great Depression. The actual decline in overall living standards started later and really took over by the early 30's - there was quite a lag, and it was 4 years from the Crash of '29 until the Great Depression was really in full force - - I think there is something to be learned from this lag! The drop was 47.9%, but history depicts this crash as the worst when it was far from it.

3rd: Date Started: 1/19/1906 - Date Ended: 11/15/1907

"The Panic of 1907," this event was the catalyst for the passing of the Federal Reserve Act of 1913. The Fed was supposed to end all depressions (kind of like the First World War was the "war to end all wars!"). The market fell 48.5% and was ended when the Treasury bought $36 million of govt bonds to stem the decline.

2nd: Date Started: 3/10/1937 - Date Ended: 3/31/1938
The drop was 49.1% and was due to war scares, corporate scandals and a continuing need to flush debt out of the economy left over from the 20's bubble.

1st and Worst Crash of All Time: Date Started: 4/17/1930 - Date Ended: 7/8/1932

The drop was 86%. The market didn't go past the peak level of 1929 until 1954. The period we know as the Great Depression encapsulated several of the worst individual crashes of all time. Arguably the Depression ended at the beginning of the Cold War and the placement of the World on a permanent war footing. With the West constantly spending on weapons for the next 50 years the economy could be kept growing, while the government kept taxing, borrowing, stealing from Social Security, etc. and of course more and more spending. When you compare the condition of the US and Global economy during the past 10 worst market crashes you rapidly reach the following conclusions:

The crashes of the past were brought about by events that are quite tame compared to the situaton we face today.

The next crash will cause a depression that will be unlike anything experienced in several generations, the amount of debt that US consumers, corporations and Federal and local governments owe is astronomical compared to the past - flushing this debt will not be easy (understatement of the decade!).

The world is going to change in ways we cannot predict or prepare for.

Wars and Major Crashes go together.

All Civilizations and all Empires end sooner or later - and usually as a function of Fiat currency systems and inflationary political pressures.

Here is a link to the article I borrowed liberally from for this post:

http://mutualfunds.about.com/cs/history/a/marketcrash.htm

Cheers Rich

Posted by: Rich at April 14, 2004 10:01 PM

This article is interesting.

http://www.investorplace.com/free/jdiw62.htm

I think he his right about gold and oil but deadly wrong about housing. He is a bull and thinks the economy is going to keep humming along just fine. However, he doesn't realize that the gold and oil part of his argument feeds right into the deflationist bear thinking. The elliot waves confirm his 'fundamental' analysis of gold and oil.

With the 10 year note yield rising another 2% today I wonder how he can be so complacent about housing. Doesn't he know that people have been using their houses as ATMs and that a significant quantity of houses sold today are ARM's? Doesn't he know that people that live in those houses are maxed out on their credit cards and are living paycheck to paycheck?

Posted by: Michael at April 14, 2004 11:05 PM

Everyone keeps saying money is created by debt. It doesn't have to be.

Money is paper and ink. Run the presses a little longer and you have more of it.

Any thoughts on government sanctioned "counterfeiting" AKA the "plunge protection team"?

http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm

What if the government was willing to "cheat" to stop the collapse?

There are rumors that money can be created at will without deferring to borrowing to prop up the stock market.

We know they cheat to prop up gold...

By the way, the April 1 naked short rules are starting to kick in. They had 8 business days to cover naked shorts which is today. Followed, by up to two 5 day extensions.

Canada is exempt and can continue counterfeiting US securities as long as they are not sold to Americans.


Posted by: steve at April 15, 2004 12:40 PM

Woops. They cheat to prop down gold.

Posted by: steve at April 15, 2004 12:41 PM

Any economist around ?

I'm trying to figure out what could explain the current drop in the velocity of money circulation.
Classical views go : as real interest rates go down, it is cheaper to borrow, people borrow more and buy assets. Asset prices go up in a speculative boom, as they look cheaper because of the low credit costs... Then come the bust.
Keynesian views go : as real interest rates go down (as people expect a raise in real rates), it is cheaper to store just cash. Why invest in any assets whose price can only go down when the interest rates will go up.

There is some contradiction in here... Though you could say as interest rates go down, people borrow in order to buy assets AND store more money in cash.

This storage of cash slows the velocity of money.

It should also reduce the "credit multiplyer".
Do any of you see any sign that some people would borrow lots of money and then spare it, store it, not into real assets but into cash or proxies of cash (elements of M3).

Is there any other explation to the slowing of the money velocity ?

Does any of you agree with this :
as interest rates drop, people invest more, then after some point (and progressively) store more and more cash as they all expect a raise in rates and a deflationnary impact of such a raise. In that case, creation of money becomes ineffective because :
1 cash is held more than spent (less velocity)
2 people rather spare cash than invest (or spend, this reduces the credit multiplier.

In the end, everybody borrows to get cash, people even sell assets to get cash ... and so on...

In the deflation process. Lots of debt is erased and lots of cash disappears (think of your "cash" in the hands of some overleveradged bank)... But possibly lot's of it remains. Lot's of central bank cash namely. And as people start to expect prices to go up (espy assets), they stop storing cash... and there inflation comes...

But all this related to that question :
do people store more cash ? Do they do so even though the gap between short term and long term rates should tell them to invest long term.
Is there let's put it this way a lack of liquidity premium on long term rates ... Something like a lack of confidence in the level of asset price today.

so once again : how to interpret current slowdown of money velocity ? DO people spare (relatively) more in cash ? Is the credit multiplyer going down ?

Posted by: Dubreuil at April 15, 2004 09:57 PM

To clarify my last point, many believe the plunge protection team is allowed to "counterfeit" money to prop up the stock market to stop a crash.

It is possible the CIA can do the same thing - have the bureau of engraving print bills without registering the serial numbers or backing with offsetting debt for clandestine operations.

Dubreuil, the best explanation I read was one that talked about the stickiness of money which is based on crowd psychology. If you believe money will be less valuable in the future (because interest - inflation gives you a negative rate of return), then the velocity increases because no one wants to hold it. If interest rates skyrocket, then people hang on to their dollars to get a high rate of return.

The reality is more complicated. If I think I may not have a job next year, I may hang on to money even if it means I get a negative rate of interest. I decide that I am willing to lose some to inflation to have the safety of liquidity.

IE. The velocity of money can be low even if they are doing everything they can to get people to spend because people are fearful and are hoarding for the future.

Also, stocks and housing are sinks for funds even if interest rates are low. I may skip buying that SUV because I'm expecting to get DOT COM rates of return on my home and stock investments.


Posted by: steve at April 16, 2004 09:58 AM

this is the other way round. When interest rates are high, no body wants to hold dollars because they yeld a lot if invested ... And when low they keep their dollars.

My question is ... How can people both borrow and save more dollars ?
Does it happen that some people borrow and save ? Or is it different people (some borrow and spend and other save in cash or cash equivalent (M3) and that money is used by bank to finance the borrowing ...

Posted by: Dubreuil at April 16, 2004 09:03 PM

Dubreuil, Steve,
There is no credit multiplier. The multiplier is actually the Federal Reserve Requirements. Say for arguments sake there is only one bank and the Federal Reserve Requirement is 10%. The bank receives a deposit of $100 then it has $90 to loan because it must keep 10% as a reserve requirement. Next it receives a deposit of $90 etc. Rounding up to the next whole dollar, every $100 is equal to $863 assuming all of the money is borrowed and spent. There are other factors in addition to this one to calculate the real multiplier.

People cannot borrow and save realistically. What this would mean is that a person would borrow at 3% and be guaranteed 5% with very little risk. Why would you borrow and take risk? In addition, if a person is sure that he would have no risk wouldn't a bank know about an investment like that and take it for themselves? Alternatively, is the investment a ponzi scheme (too good to be true) and therefore one would have 100% risk. I do not think an investment to have nearly zero risk is possible in the real world.
As far as loans go, this is a social mood problem. In the 1930's the banks were willing to loan to corporations at 0% for 5 years and there were almost zero takers. This is because nearly none of the corporations knew what to do with the money. They did not want to invest in new equipment or expand because none of them new what type of product people would demand. The money was there if one could prove that they did not need the money. The corporations that carried a risk sold bonds and they had to give a 10% interest rate while the rate on government bonds were near 0%.
Examine the Japanese interest rates now. Seven years and under is paying .2% that is .002 as a multiplier for 10000Y the money one makes is 20Y. For every $100, they get 20 cents per year! The rate is low because people do not trust other investments, the baby boomers of Japan are getting old, and they want near zero risk.

If a depression happens in the US, it will happen quickly. Social mood is important (Look at the amount of commercials that are on TV that want to help people to pay down debt.) When people finally give in, the decline in real estate and stock markets will happen quickly. Real estate may take a year or two to hit rock bottom though.

There is a book that an engineer did and he compares the stock market numbers to the population numbers it is very interesting. Some may call it a book for crackpots and say what does an engineer know about economics. He makes several correlations to peoples spending habits in all age groups. He has some good information on the baby boom generations in Japan and the US. It is cheap and a quick interesting read.

The Great Bust Ahead by Daniel A. Arnold

Steve the CIA has other ways of raising its money. In addition, as far as a 'commission' to buy stocks, is way off. I think it is a little too much of a conspiracy theory. The Fed has much more powerful tools than that to control the economy. Examine the FOMC (federal open market committee)

Posted by: Roy at April 16, 2004 11:58 PM

To the person recommending the book
The History of Business Depressions by Otto Lightner.
I purchase a copy (it was republished in 1971) and will read it next month when things are not hectic for me.

Thanks
Roy

Posted by: Roy at April 17, 2004 12:02 AM

Meltdown - Yes

I have read numerous articles on this web site relating to the coming meltdown. I concur with many of you. Still I have not read an article by any of you proporting the obvious. Why? Are you afraid to say the obvious? Or are you in a kind of mutual denial? Here is what I see after taking in all your opinions and research.

We are witnesses and participants in a programme that is orchastrated by the great and identifiable powers of our age. The need, control global profit, the motives greed,power,authority etc., the method, unhinge the current global economic system of free markets using existing market systems against themselves creating an implossion and establish regulated, controled fixed markets using a single currency, the goal the establishment of a global centralized government, the result one world government.

Not since the Roman Empire have we participated in a one world government. "All roads lead to Rome", all the money did too! With the whole world taxed and those taxes going into one central government, think of the problems that could be solved by directing such resources. Much good could be accomplished. The real scary part is who will decide where and what to spend the money on. Well that decission has been in the making for the last 50 years. The powers that will govern will be the ruling class of today, the wealthiest individuals of every nation.

Such a system will create three kinds of citizens. Those who rule, those who pay and those who are slaves. We will see a return to slavery with this one world government. It's cheap, manageable and effective. It always has been. As reprehensable as this thought is, it may be very close to the truth we will see realized by those who desire such a world.

The rulers are already established and identified. The citizens are those who own something that the rulers do not yet own. The slaves will be all those forced into bankruptcy who will owe the state, not the bank. For the bank will finally become the state in this new world government. This in part is what the coming meltdown will bring about.

The United States will not go bankrupt it will still have its military currency (nuclear weapons)to draw on. The Russians still manage to eek out an existance and so shall we. It will be very different, it will be very soon, it will be our new reality.

Posted by: Mark Aarssen at April 17, 2004 12:36 AM

mmm
The more I think of it. There is something weird with this money velocity thing and the lack of inflation.

I mean money is created by huge numbers. And yet no inflation.
Why ?
Because people do not spend the money, they buy assets like crazy, and they store money.

Where has all the money creation gone ? Why does not it make its way into prices ?

Is it because rational agents know the market will go bust and hold to cash ? SOme now may be, but I don't think this is it.

Then what ?
Is it because inequalities have risen so greatly that the only ones who earn more cash can not spend it. So you have those earning less and borrowing more, and those earning more and investing more, in bonds, cash, stocks ... whatever. They have too much money and cannot find ways to spend it (not enough paying trips in space shuttles).
That would be an explanation.

Have you heard of anyother explanation of why velocity goes down, why we have no world inflation (for the USA one could say that's because the world sucks the dollars out of the country... but is that the only reason ?)

Posted by: Dubreuil at April 17, 2004 01:41 AM

ooh and as a response to roy my comment was :
Do you know of anyone borrowing at 3% in order to save at 0%, because :
he thinks interest rates will go up and better borrow now, and his revenue will stay the same (let's say he works for the government, or he's just optimist), while prices will go down, so he'll better wait till he buys.
Another way would be, that guy has a credit of 100 à 8%, move to 110 at 3%. He saves the 10 at 0% for dangerous times ahead and still has more cash...

My other point was, if the velocity goes down, does it imply saving goes up ? (and the multiplier goes down ?)

Posted by: Dubreuil at April 17, 2004 01:53 AM

Money is usually a unit of measure. Wealth is A) energy and raw materials, B) Manufactured goods or C) Services.

Wealth exists independent of money. Double the length of a ruler and things that used to be six inches long are now a foot. Double the money supply and things that cost $6 cost $12.

A depression is as silly as letting a train leave half full because there aren't enough tickets to go around. Hard working people sit on their ass and people that demand there services can't afford them because they don't have enough measuring devices to make the transaction occur.

Barter could fix the problem, but that's illegal.

Train tickets aren't wealth. They only measured the available seats.

The problem is that money is also a store of value.

When humans have psychological fear - the war in Iraq, unemployment, terrorism, etc., they tend to hold onto money and let it serve the "store of value role".

Dubreuil, you misunderstood me. When I say "hold onto money", I mean it goes into the bank and disappears from circulation.

It is this psychological effect that causes depressions - not anything to do with the number of dollars / measuring devices.

It actually makes sense to print money if it decreases the unemployment rate. With less unemployed, there should be more wealth which justifies a higher money supply.

It's this "jobless recovery" that is scary. Real wealth is stagnant, but there is this magical illusion of prosperity, because stocks and real estate go up as money is pumped into the system. There is a delay before people realise there isn't enough real wealth to back the paper.

Posted by: steve at April 17, 2004 12:31 PM

Dubreuil, the other mistake is believing governments don't lie.

Hmm, oil is going up. Sheesh, food is more expensive than it used to be. Funny how expensive housing and stocks are.

Gee, everything I buy costs more in 2004 than it did in 2003.

Good thing that the government reassured me that there is no inflation....

The powers that be will use the plunge protection team and counterfeit money, fake statistics, fake corporate profits, etc. to keep the system solvent.

My point is that it could work. The only thing that matters is human pyschology. If people produce and buy from other humans, then wealth is high. The relative value of the measuring device will increase and decrease with the money supply, but it is independent of true human wealth.

In an ideal world, a feedback loop would cause US debt to return to zero as the US currency fell causing a proportionate increase in US exports and decrease in US imports.

The people that loaned the money would end up with less for being stupid enough to invest in a falling currency.

The difference between now and 1929 is that the powers that be understand the mechanisms. If there is a big crash, it will be an orchestrated one.

Posted by: steve at April 17, 2004 12:38 PM

There was a link on one of the depression sites to a default on a 2009 30 year bond to Saudi Arabia (as of 2004, the US government will stop paying interest).

It made me think about the huge coincidence that it was exactly 30 years from the 1973 oil price shocks that America invaded the middle east.

It seems like they are setting up permanent bases in the Iraq and Afghanistan to control the oil in the Caspian basin, middle east and West Africa. I'm not sure how this might relate to a potential repricing of oil contracts in Euros instead of US $'s. That would be bearish on the US currency.

Most of the 1973 / 1974 OPEC profits came to the US banks and then was "invested" in third world debts.

Does anyone know anything about the 30 year bonds which must have started maturing last year?

My other thought is that war is extremely bullish for the economy. Even if the citizens are overly indebted, military spending will keep the economy from going into a depression.

Posted by: steve at April 18, 2004 10:00 AM

The "great depression" is probably not a very good parallel to our current unfolding crisis. Money creation was limited by its connection to precious metals; our modern central banks have no such restriction. Deflation involves contraction of money supply...does anyone doubt the willingness of the world govts to flood markets, industries, banks with fresh supplies?

Perhaps those "in the flow" of these fresh supplies will keep spending, & the "recovery" will continue. Govt willingness to bail out will encourage banks to lend. Govts contractors will hire. Govts will continue to orchastrate markets to look right. Govts will feed news to team reporters & starve those who don't play ball.

The point is, we have no idea how long the play will continue. The "Great Depression" unfolded regionally, depending on area industries & local property values. Bank failures hurt more people than market crashes, & those asset auctions further suppressed values.

Our modern system, w/FDIC & govts willing to bail, will infuse fresh supplies wherever needed. We may have to watch another act or two, before the final curtain. Hell, they can keep us guessing for years.

Posted by: Brooker at April 18, 2004 11:14 PM

It is possible for the money supply to grow even if rising interest rates make people want to save. All the treasury has to do is issue fiat money directly rather than borrowing it from the banking system. I believe that's how the plunge protection team works. They print money directly to prop up the stock market.

Posted by: steve at April 19, 2004 06:41 AM

A good article on the causes of the depression.

http://home.hiwaay.net/%7Ebecraft/GreatDepression.pdf

Here's a thought. Let's say the value of the US dollar in Euros is cut in half over time, but the domestic money supply is doubled.

Expressed in Euros, the money supply has not increased. The foreign debt, which is expressed in US dollars has been cut in half to a more manageable level.

The disadvantage is that imports are twice as expensive, but the advantage is that the domestic economy is booming as US goods and exports are cheap. Americans buy from Americans and the standard of living is not affected that much except for imports.

The only problem with this scenario is oil. If oil is repriced in Euros, then oil imports will be twice as expensive.

If America could be totally self sufficient, then the exchange rate doesn't matter that much.

Posted by: steve at April 19, 2004 10:54 AM

http://groups.yahoo.com/group/frameup/message/52

Posted by: steve at April 19, 2004 12:11 PM


Where has all the the newly created debt money gone? Should't low intrest rates and heavy borrowing cause inflation and an increased "velosity of m3"?

Well the velosity of money is not up because most of us are now 'next door to bankrupt' and out of work. This tends to slow spending. (At least it does at my house.) No, scads of sneeky people are not borrowing cheap money and stuffing the cash in their mattrases. Jeeshh. Neither are we much inclined to invest in Certificates of Deposite paying a whopping 1.233% (compounded daily of course...whoopie again).

So where is the new debt money going? Perhaps some of you have never heard of inflation, aka monetary inflation. That means that the money is getting 'sopped up' in higher prices. No, the News Lady hasn't noticed yet but, HEllO! the price of every thing, except stocks this time, is going through the friggen roof.

I think they call it "increase in asset value" these days especially when the 'warm fuzzy' real estate market is mentioned. Take OSB board (what they build houses out of) for example. Last year it was 4.95 a sheet. Now it is 17.50/sheet and climbing. Is that inflation or "asset value appreciation"? The price of land has quadrupled in the last 10 years. Nice, till you try to buy some. Health care going up? Don't even THINK about a week in the hospital. Insurance going up? Nawh, just your imagination. etc etc. but you don't really want to hear any more. But you will, the next time you fill your gas tank or pay your light bill.

Posted by: AWR at April 19, 2004 01:17 PM

Let's sum up :
1 - Inflation has been underestimated because asset inflation is not taken into account, because quality is taken into account when it lowers price (computers), but not when it pushes it up (ever thought of how in the past goods would last for years, and now they need be replaced every 2-3 years)

2 - Some people do store cash or cash like bonds, because they expect everyother asset price to fall

3 - The government can create central bank money at will, but it cannot force the private banks to lend. If consumers cannot repay, banks may stop lending in which case money supply will fall, and printing more cash will not do the trick as the numbers are not in proportion (compare M1 to M2)
There is no way more money can lead to inflation when you are in a deflation time (See japan 10 years with 0 interest rates, and no inflation).
See the last figures. Velocity goes down. M3 grows less and less rapidly.


Which leaves us with this question : if as seen in the last ten years inflation or deflation is not related to government money supply then what ?
My best bet is : inflation goes up when the % of wages in the value added goes up, it goes down when that % falls. When you think of it it is natural, if wages move faster than your added value, your only possible course of action is raising prices. If wages move slower, you can reduce your prices, or make more profit.

Posted by: Dubreuil at April 19, 2004 05:01 PM

While it is true that inflation has been underestimated due to asset inflation over the last few years I believe this is a temporary reaction to the huge amount of monetary stimulus the fed has created. Someone on this web page said once that this monetary stimulation will act like a fire when you pour gasoline on it. It will burn hot and bright for a few minutes but after that its gone and so is the last of your gas.

My guess is that when you look forward the deflationary forces will be too strong to be overcome. Everything except cash should fall in value including oil. It is likely that oil will fall in price in the near term because the huge run up in prices is not related to supply problems but rather rampant speculation by speculators who are looking at an asset class that will appreciate further.

I don't know how it will all go down (pun intended) but it is logical to assume that during a depression the price of oil will drop because people won't have to drive to work because they won't have a job. People won't drive to vacation spots because they won't have the money to go on vacation. They will only drive to those places that they need to go to near their home. In the beginning there will actually be a glut of oil on the market. I think we are close to that point now. Why do you think the Saudi's wanted to cut back on supply with oil at $40 per barrel?

Posted by: Michael at April 19, 2004 11:39 PM

Michael.. what you are no taking into account is that the US imports oil.
And with the confidence crisis a depression would bring ( if a depression does come ).. do you really believe that the oil producers will want those worthless papers as pay?
( What do you think the current US problems with Venezuela, Saudi Arabia and a long etc.. mean? )
There is a big difference bettween this days and the 20's: the US is the world's bigger debtor now ( and the dollar has no pretense of even some real backing )..

Other than that.. I would like to see what people think of the following.. there has been too much talk lately about the US rising rates... actually there has been so much talk that the market has been doing the fed's job by raising long term rates on it's own..
Does anybody else see some expectation management at work here? meaning: I believe the fed will only rise rates if it's truly forced by the markets to do so. At the same time they want to cause the least amount of disruption when this happens.. meaning that the many carry trades at work today don't throw back any major financial institution when the trades are reversed when rates go up.
So my guess is that they throw in a couple of early warnings.. to:
- get the players to start unwinding those position
- get the market to start doing the job for them
- keep the ball running for as long as possible without it ending in a dollar crash

My guess also is that in all true reality they are not really intending to raise rate so soon as they seem to be...

What do you people think of this analysis?

Posted by: couple of thoughts at April 20, 2004 10:41 AM

I forgot to say in the messge above.. that when the carry trades are reversed or stopped in commodities, inflation is slowed.
Also when the foreign currency carry trades are reversed the dollar resurges.
( both reversed by expectations of a higher rate )

So just by talking rates up they can have the effect of a rate hike without actually having one.

What do you people think of all this?

Posted by: couple of thoughts at April 20, 2004 11:49 AM

My basic idea is that they are scared of death of deflation, a dollar crisis and a banking crisis.. but they also want to restablish some sort of balance in the US current account.. therefore they are chasing inflation and a weak dollar, but they want it to happen as slowly as they can... ( low rates help this ).. And only if things get truly out of control they will actually raise rates to avert a crash.

With this in mind is that I have the theory that the recent talk of a rate hike is just expectation managing.

Posted by: couple of thoughts at April 20, 2004 11:55 AM

here are my last thoughts :
let's say all goods for the equivalent of a currency.
Inflation is a devaluation of the money compared to goods
deflation is reevaluation of the money compared to real goods.

When your currency is going up, or you fear it going up against another (let's say you are japan). Then you buy this currency, create fiat money.
But there are 2 things to take care of :
The current level of underevaluation of your currency.
THe tendency of the underevaluation.
You can fight a level. Not a tendency.

Proof : Japan has built stocks and stocks of dollars. Can it build these stocks forever in order to defend its currency ? Answer : No.
Sooner or later, if the tendency persists they will have to sell. They will be forced to stop their policy of artificial devaluation of their money, especially if this policy is helping promote monetary growth in the USA, widening the imbalances there ...


So about devaluation.
What has happened ?
In order to fight inflation, there were 2 options :
1 stop money creation, have a good crisis, and hopefully start afresh after some dire times.
2 forbid wage indexation on prices, reduce workers waging power, reduce companies pricing power, free the capital markets.
In so doing you can have money supply, and no inflation of goods because all the money is sucked up in the financial markets.

But at one points the asset prices are way to high ... And (I should have made a model with 3 currencies, the money, the goods, the assets) so is credit. Everybody becomes convinced that asset and the money base will go down simultaneously. There you have deflation.
The central bank can try to fight this by buying more and more assets (the equivalent of the foreign currency), but it is ineffective as long as the trend goes on.

OK my thought is not as clear as it ought to be, but I hope you get the meaning. WHat is the underlying trend pushing towards deflation ?
THe risk of default payment, the growing size of debt when related to revenue.
YOu can not fight it with low inflation rates, in fact you are speeding it.
And of course you can not forever build more debt and money.
So you are on a razor between deflation and hyperinflation. And the reason hyperinflation can not strike first is that hyper inflation in goods would start by hyperdeflation in asset prices and this alone would create major bankrupties in an over leveradged economy.

I hate being so unclear. I'll work it out better.
My point is, the central bank cannot buy all the assets in the economy at their current price. It knows their price has to go down and that in buying them it is fueling price growth. So that buble has to pop.

Posted by: Dubreuil at April 20, 2004 05:15 PM


>(See Japan 10 years 0% intrest rate no inflation)

Japan is not the USA. The Japanese *save* (that = "deposite cash into personal bank account" for those who think "save" means getting 10% off a $600 hand bag) 5 to 10% of their income. Americans *borrow* 10 to 20% of their income.

The Japs had their own private deflation. They still had the rest of the world, economically intact, to sell to. How many Buicks are we going to sell to them, or China, or Iraq ? We can continue to sell them wheat, if only to keep domestic bread prices high.

In other words just because they had money there to borrow at 0% doesn't mean that they were careless enough to do so.

Posted by: AWR at April 21, 2004 09:59 AM

hey april ...
you have to answer this one. Debt is rising faster than revenue. Total american debt is now 5 times the GDP, and that is a conservative figure because medicare, medicaid, public pension plans are not counting as debt what they will have to pay in the future ...
What do you think is the solution ?

1 no problem. THe ratio debt to revenue can climb to the greatest numbers, as long as money supply and confidence is here...

Do you believe it ?

2 productivity will one day allow us to pay debt faster than we build it.
Do you believe it ?
3 Bankrupcy of the loosers will clean the market.
That's called deflation.
OK what % of debt do you think will be cleaned this way ?
4 And then we'll wash the rest in inflation.
WHat % again ?

You see there is no way out. Debt has been going up for too long. It cannot be repaid without creating a (salutory yet painful) slump.

You're basically saying;. .. You doomsters, you're always talking of hangover, but it's 5 am I've drunk 6 bottles and I fear nothing.

Posted by: François Dubreuil at April 22, 2004 07:30 AM

Francois,

I've read and read and researched and studied and heard all the formulas from moderates and bulls and bears.

I hear what you're saying, but like, where is it?? I keep hearing these dire predictions but they never pan out.

The last one was the prediciton of gold and silver ROCKETING skyward!!! Silver at $10 before years end and from there, who knows? $15? $20???

Silver is down from $8 to just over $6 now and gold is also way down. And falling every day. So what gives? Why these prognostications of impending disaster; I keep hearing "watchout, any day now!!"

But then I go back in the archives, even on this web site! You've all been saying that for years. Any day now Any day now Any day now!

It gets so goddamned tiresome!! I'm starting to think you people have some vested interest in just creating nervousness in the stock markets. It must help your portfolios or something, I don't know. Alarmism must be a good way to boost your dividends.

Posted by: anon at April 22, 2004 08:46 AM

Dear 4:06 am

Your point is well taken. One is not technically dead untill the gallows rope snaps tight around *his own* neck. There are, just to take one sad example, 600+ good Americans dead in Iraq who died to protect your "right" to cheap gasoline. But thats their problem not yours, eh?

You see, for some of us the end is not immaginary, it has already arrived.

Posted by: AWR at April 22, 2004 11:33 AM

There are conflicting views about gold, about silver about lot's of things.
THe things clear are : debt is up on % of revenue, velocity of money creation is falling, housing prices and stock prices are at an historic high.

After that what ? My bet would be some deflation then some inflation.
THe IMF says we have 2 coming years of prosperity. IT is possible.
I make no judgement as to how long it may take before people worry about if debt will be repaid in real terms.
I myself do not believe anymore it will.
Then others will. Because in the mean time more debt will be issued.
The only way things could ease is if nominal rates go up, credit stops, inflation goes up, with wage inflation higher than CPI ... in that case the asset bust can pop with no harm. People will pay debt in progressivly cheaper and cheaper money. Inequalities will go down.
That too is a possibility.
I think the main worry is : what's going to happen to all this debt, how can we design ways to repay it ...
May be, I said may be we are on the hedge of a new prosperity with renewed inflation of good and wage prices. Why not. What is sure is that asset prices will go down and so will debt as a percentage of the revenue.
My fear is that bankers in fear of inflation and investors in control of this bank, along side with companies reallocating capital globaly and opposed to any wage increase or hires ... Well capital holders will oppose slow erosion of their capital, the amount people have to repay to them... In so doing they will force a depression, bankrupties and so and so...

I believe not everyone is rational enough to accept something bad, that is bound to happen, before it is forced to.
But may be I'm wrong. May be things will reverse. Union power is on the rise.
I still believe some depression is needed before people acknowledge that there is a problem, that there has been too much credit, that the debt stockpiled will never be repaid in real terms, and that there fore, the easier way out is a slow reduction of the amounts involved with interest rates high and really below inflation + GDP and renews control on credit.

What needs to happen is a financial crisis, the end of the golden boys, the investing frenzy, all this speculating era.
An economic crisis is not necessary. But it will happen if the financial community try to resist its fate.

Posted by: François Dubreuil at April 22, 2004 08:15 PM

Anon,

If it disturbs you to read the comments here, you may want to go to another site that that is more positive.

On the contrary, IMHO, people in general are far too optimistic at this time and to the point that they are not assessing the true risk factors out there. Perhaps, they may not even be aware of them or are in a state of denial(?) Its certainly the era of the glass that is half full.

The views on this site may not be popular but there are reasons why there are more and more sites like these.

There are no guarantees in Life but it offers risks instead. How one handles risks (or the gamble)is up to one's own conscience.

A downturn can happen anytime especially with the risk factors discussed on this site but no one can accurately predict when it will happen or if it will happen at all. No one can predict the future.

We can refer to history to try to learn from mistakes made in the past. The problem is the present or future case may not be exactly the same case. Present facts are also part of the total to be considered.

Personally, I hope for the best but I also prepare for the worst. That's my view; others' may be different and that's okay. Each person is entitled to their own view.

Somebody or an ad stated (I don't remember who it was), "Patience is the mark of a good investor." IMHO, these are times to be patient because I think the glass is already half empty.

John

Posted by: John at April 23, 2004 01:27 AM

April,
All currencies are "worthless" please study money. A few tips, What is money? It is a medium of exchange. What can be money? Shells, Glass beads, Walrus teeth, Spam (the canned meat), Gold? As long as it is accepted by both parties that have the exchange.

Nextly, Can anyone predict a depression. The answer is no. Economists cannot predict a recession until it happen 6 months prior to it starting. It will come like a theif in the night.

I disagree with your definition of a depression being overcapacity. Delation is the contraction of money and credit not overcapacity. A depression happens when there is a change in social mood. This change causes people to pay back debt, save and not spend.

Examine this a couple does not want anymore debt. The have 12,000 in credit card debt. They want to pay it back in 1 year, that means 1,000 a month. Now what happens? The bank back 1000 a month, the bank must find someone else to take out a 1000 loan otherwise they loose. Now what were they spending so much money on that could not pay their debt? Meals out, Do-dads, and other 'stuff' now what does this mean if 10000 families do this? For 10000 families to do this, it is a change in social mood. Examine the aging of America and its spending habits. This might give you some insight.

It is such a social mood that the depressions before 1929 are what we call today recessions. They change the name because they did not want people to get scared and act irrationally.

As far as the explanation of the people that cry wolf over a depression, you are correct. It could not happen through the 80's and 90's. Why? Take a look at the FED. The FED had a lot of ammunition for adjusting the economy.
1 - FOMC they buy and sell treasuries in order to controll the currency.
2 - they have the Reserve requirement for banks
3 - they have the Discount Rate. This is the interest rate for banks. As the Rate is cut the banks lower their rate and then people refinance their mortgages and businesses take out loans and buy capital equipment.

The FED in the early 80's had an interest rate in the upper teen's 18%, I believe, so every time the country started in a recession, the FED lowered rates people refinanced thier homes and business borrowed. The economy restarted. Now the FED funds rate is at 1%.

If you read above or a basic economics book it will tell you what happens to money when loans are paid back and no new ones are made in their place.

If you want to prepare for a depression save money and get out of debt. If you think we are going for a good bout of inflation invest in the stock market or inflation adjusted securities.

Posted by: Roy at April 23, 2004 01:38 AM

I got two credit cards sent to me in the mail. Actual cards, not applications. This worries me, because my credit is not THAT good. I used them to buy silver bullion coins and some small gold.
I try not to carry any debt. I rent, no car payments etc.

How do you feel about using credit cards to buy bullion??

I think this is the best use for them. Buy value, repay in rapidly depreciating "dollars".

Posted by: Chuck at April 24, 2004 09:59 PM

Chuck, you've put your money where your mouth is. However, there are a couple of problem with borrowing to invest in gold.

If gold breaks out & up from this current correction, your plan will have worked, & you can sell to pay the bill off. But if gold drifts down much more or even just lingers around $400 for awhile, you may be facing some decisions.

The markets have already demonstrated that higher interest rates will, at least initially, affect gold's price negatively. How long that effect would last is another question.

But the point is, you could give yourself some sleepless nites. Retribution for our current excesses is required by the god of economics, but the problem is in the timing.

The manipulators are very good at what they do. They are willing to use every method to manage what ever needs managing: markets, news...us.

Perhaps there is another rabbit in the hat, card up the sleve, buyer for our tulip bulbs. I don't know.

It is no consolation to be right, but way off in the timing, especially if you are gambling with borrowed money.



Posted by: Brooker at April 25, 2004 06:43 AM

Read the Protocols of the Elders of Zion, I know, ha-ha very funny, read it, I mean really read the thing, then come back and laugh all you like.

Posted by: Alex at April 26, 2004 02:12 PM

As you may have noted, I'm looking for first hand statistics. Working on a small paper of presentation of the current macro economic risks for the (energy) company I work in.
Do you know where I can find statistics on :
total debt (household + companies+ government)
Inflation
Money supply
Money held by foreign holders

I was wondering if anyone could figure out, what was the % of GDP financed by the growth of the total debt.
Because as said before there's only 3 ways out of debt :
Paying it real term. (this would imply that the reduction of debt would reduce the GDP instead of the growth fueling it)I've never seen anywhere that figure.
Paying it through inflation (with the long term debts issued in the years 2000 getting negative real interest rates because of inflation)
Not paying it through bankrupties.

Posted by: Dubreuil at April 26, 2004 04:29 PM

Try the statistics at the federal reserve and for us debt try the bureau of public debt at the treasury website. If you look at those two sites you should be able to get enough information to calculate what you desire. Of course you do realize that we function under assignats, not real hard currency- so to pay our debt we just sell it to the federal reserve- which prints up more debt called money and puts it into the tank. Blip blip blip the money supply keeps cranking.

Posted by: Allen M at April 27, 2004 02:25 AM

as told earlier. I do not thing fiat money is the problem. Credit booms and bust have happened before and will happen after (if an after comes) fiat money. People invest in the future, then spend hoping the future will continue to improve, better phrased spend before the crash, then suffer the crash and save in hope of better days, then start ton invest in the future.

Posted by: DF at April 27, 2004 04:31 PM

thx
I have a wonderful paper from a guy from the fed reserve dec 2003. It mentions how in 2000 Japanese bankers were convinced deflation was behind them and inflation soon to come.
How can anyone believe such fairy tales.
Yes prices are rising because of commodities. But as long as they do not transfer to wages, all they do is reduce demand, which means in the end, reduce prices of local good, create bankrupties ...
Inflation is the best way out of the foolish levels of debt and asset prices.

Posted by: Dubreuil at April 27, 2004 11:03 PM

I am so glad this board is being updated everyday.I am hoping to get some feed back on some ideas I have for preparing for the coming Decline. I orignally was(still am)going to sell my house which has valued way above normal. Taking the 14-20k of "profit" from it and rolling it back into all my debts and except for student loans would be debt free. I would sign into a 2 year lease for a rental and try and drive the montly price for that down as low as I could get it. Maybe even taking my dollars and paying 6 to 12 months rent up front for a 5 or 7 % reduction of rent(I figure the value of that dollar won't go up 5 % in the next year so why not get some value for it now). I would then spend the next 2 years paying off the feds and saving and buying gold.

Well I may have seen the writting on the wall to late. I have had my house up for sale for about 8 months at a price that was comparable to houses that had sold in my immediate neighborhood as recently as last summer. I don't know if this is bad luck, or possible the beginning of the real estate glut that I was concerened about, and the subsequent fast fall in prices and in the end any equity(and into negative equity) I may have had.

Now onto plan 2. This is most definitly not my first choice, but I'll be damned if I'm going to loose my house and be in debt still. Most of the debt i'm holding onto I have paid the princible and then some back(ie a 97 Jeep that I've paid almost 23k toward but still owe 6500). I have a nice house with some decent land in the city(about 1/3 acre). My plan is this. Take all my unsecured debt and declaring Bankruptcy before the congress acts. My thought process behind this is as such. I will get rid of all my debt through bankruptcy and be left with only my overvalued house wich I have a decent payment on. Stop seeing my house as an investment and more as a castle to ride the storm out in. I have enough space for a huge garden, and lots of space for storage. Plan on doing everything I can to keep my house through this downturn. Never again get credit for anything(my house is good enough to stay in for a long time, it's not big at all, but it's very nice). Learn to live below my lifestyle, and get as small as possible.
I have two wonderful small children and a extremely supportive wife(if she wasn't we would have divorced by now). Start to enjoy a simple life again.

I would like your opinion mostly on option two. Is it ethical for me to do that. Conventional wisdom would say pay what you owe. But after reading this forum as well as allot of others, you start to see just how rigged the system is. We are taxed to the point where we have to send our wives out to work and put the kids in daycare. The banks inflate at an atronomical rate every year devaluing whatever the governent didn't take in taxes, leaving us with little or no recourse but to pay minimums till infinity. If a return to normalcy is what we all want, don't we all have to accept the fact that the current system is fatally flawed and is no longer able to be reformed(ie prunning the branches off of a dead tree). Would it not be better for us to first and foremost stop the insaninty(that I willing entered into) of credit buying, and secondly to hasten the fall of the current system, declare bankruptcy en masse, and bring the whole system down ? Let me know if I am deluded or maybe onto something.

Posted by: FeelingWierd at April 27, 2004 11:11 PM

The system works flawlessly:

The rich don't care.

The poor don't count.

The workers pay double,
while soldiers die.

Soooo, whats the problem?


Conclusion: The meltdown has already happened.
Tiz a fine day for the buzzards.

Posted by: AWR at April 28, 2004 12:45 PM

AWR,

You mean the meltdown of the price of gold and silver??

Anyone care to exlain why these two precious metals have plummeted like stones in the ocean if we are supposedly facing the economic death of the US Dollar?

Posted by: Keitel at April 28, 2004 09:46 PM

Since Kondratieff Winter is, by definition, a season of deflation during which the excessive debts of the previous seasons must be purged, it seems the ultimate course for the economy is deflation, despite the Fed's attempts to mitigate the consequences. However, the current Fed, armed for the first time with knowledge that there is such a thing as this longwave cycle and having to deal with it during one of its winter seasons, is fighting by flooding the economy with new dollars and keeping interest rates at ridiculous lows, the effects of which have so far kept the dire consequences at bay. Thus, it would seem that inflationary forces, possibly followed by hyperinflation, would occur before the inevitable deflation that characterizes Kondratieff Winter sets in, possibly triggered by a crisis or collapse of the US dollar or the excessive demands for underfunded entitlements due the baby boom generation. If so, it would make sense to pay down debts as much as possible during the initial inflationary phase, using ever-cheaper dollars along the way. Then, using the debt payment amounts to accumulate cash to have on hand for the bargains that will be available during the deflationary phase. Comments?

Posted by: Spica at April 29, 2004 09:23 AM

My two cents

The BIG question ist, whether there is an Inflation starting soon (as Spica suggested) or first a deflation occurs. As much as I have heard, deflation will win. So, it would be wise to have no depts. But who knows for sure???

Ben

Posted by: Ben at April 29, 2004 05:11 PM

Kietel

No I didn't mean the price of gold $ silver (not to mention platinum down 200 bucks!?) The prices were going up -I thought- don't watch too close these days.
I forget this is a comodity site mostly. I was trying to bring in some perspective from the 99% of us who don't trade metal. My point is the REAL ecomomy SUCKS like right now.

Why are metals taking a dive? I don't know. Ask an experts...oops all the experts said it was going to the moon...oops! A few words come to mind however, "profit-taking", "crowd psychology", "panic", "end of the world" that sort of thing. Lets just say I have a bad feeling about this.

Posted by: AWR at April 30, 2004 04:38 AM

This article seems to have a good discussion about gold and silver price history.

http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/Outlook.htm

I would expect gold and silver to decline in a deflationary phase and rise in an inflationary phase. My Elliotwave.com subscription called this decline in the silver market very well.

Posted by: Michael at April 30, 2004 05:35 AM

Much of what I have read suggests a Kondratieff Winter began with the tech crash in 2000. However, I would suggest we are still in the final throes of a blowoff Kondratieff Autumn, with one bubble (stocks) being supplanted by another (housing, debt), until the day the final bubble bursts and propels us into the deflationary Kondratieff Winter. It seems the seasons of the Kondratieff cycle are getting longer as human lifespans increase. The cycle could take 75 or 80 years to complete now, whereas they used to take around 55 years.

Posted by: Spica at April 30, 2004 06:11 AM

Dear anonymous on April 22,

The people who post here are able to see into the future, through their understanding of history and of human nature, much farther than you are. They are the people who recognized a bubble forming when the DJIA reached 5,000 in the mid 1990s. They didn't know it would reach 11,750 before it popped. They just knew it was a bubble and that it would pop eventually.

The events discussed here will happen. We don't know exactly how or when, but we know it will happen and it will be ugly. It may occur five years from now. It may not be completed until 20 years from now. But it will happen. History tells us this always happens. So go ahead, take out a cash-out mortgage on your house and buy that gas guzzling SUV you've been eyeing. As Scarlett O'Hara said, "Tomorrow is another day."

Posted by: Spica at April 30, 2004 10:29 AM

Feeling Wierd,
The ethics, I think you know what is ethical. But I wish to point out that a bankruptcy will not wipe out your student loan(s). Read the fine print.

Secondly, If everyone en masse decided to declare bankruptcy, I do that will not happen because of the following. The creditors and/or court can choose to force the person into Chapter 13. Chapter 13 is a reorganization of debts. Some say that the reorganization can happen for up to 5 years. The court will take your earnings, bank accounts, tax returns, etc. The court then sends them to a court appointed bankruptcy trustee. From there the trustee will pay whatever they think is necessary and a little for theirself and leave you with the $40 a week to take care of your family. Yes, the mortgage and taxes will be paid. But would you be willing to go around with old clothes and rice cakes and chunk light tuna for the evening banquet?

Another thought if you were in Chapter 13 and tried to sell you home the court would get involved and take their fees along with the money owed.

Please be responsible.

Sorry for my bluntness,
Roy

Posted by: Roy at April 30, 2004 11:05 AM

Dubreuil,
To find out about debt in the US. It is found in the "Flow of Fund account of the U.S." It can be reached at the following address.

http://www.federalreserve.gov/releases/Z1/Current/z1.pdf

It is 124 pages long. Hope it helps.
Roy

Posted by: Roy at April 30, 2004 11:27 AM

Hi there ... Still spending some precious time on doom ideas ... Not all of it was worthless.
There's a post of a guy under the IMF post (best years for decade..) really interesting. It's basically advocating a tax on money. A bank note would lose 5% annualy.
This would prevent the srore of wealth in money form, in the very same way as inflation and high interest rates use to do under the current system. Those who care, please take some time to read it
http://userpage.fu-berlin.de/~roehrigw/kennedy/english/

Right now seeing 4 months of non progression of the stock index... I say. Come on. Bring it on. Give us that crisis we need.
Is it too soon ? I'm not completely covered yet, now moved totally out of stocks ... Who cares...
Are we ready for it. No probably. And I wish my Ph D be over. OK. (but then I would not be spending my time not doing it ...) And still...
There is no way out. Inflation can not happen because wages are sluggish on the up side right now. So ... Debt can only rise. And as soon as interest rates will rise. pop will go the bubbles...
Yep tough times ahead for corporations, states nd all of us.
What's the figure for employment in april. When is the next pb in Iraq ...
ok forget my sayings.

Posted by: Dubreuil François at May 1, 2004 12:43 AM

Great to see the various opinions here from people who see the real picture.

Scenario: My wife and I just sold our house and will be moving in with her parents for a year or two while we save some more money for a new house and have some in-home (and free!)babysitting for our one-year old, courtesy of the in-laws while we work. We are going to have a fair chunk of money from the sale of our home to put somewhere during this year or two.

It is so difficult to find advice that comes from a source that takes into account the real state of the economy, as one might read on this site and others.

And now I am torn between wanting something safe and secure that might weather a possible storm (if it does manifest itself this early-) and recognizing that it will probably be a LONG time before I have a sum of money like this to put to work for me. I am not interested in doing anything TOO risky, but I wonder if there is a way to put my money somewhere secure, but with potential to make me some money if things begin to go sour.

I think it's fair to speculate that things could take a turn for the worst after the Nov. elections. (how far, who knows)

So, I've had some people suggest gold and silver, or even buying some Euros, but I'm not sure. I won't have to decide until my July closing.

Any opinions on this scenario would be EXTREMELY appreciated. Thanks- Dru

Posted by: Dru at May 1, 2004 07:39 AM

Dru,
First ask yourself, What debts do I have? If you are debt free that's great.

It seems that you are not sure where to put your money. You will have to ask yourself and your wife, how much are we willing to risk?

A low risk would be series I savings bonds. You can buy them at the bank. You can place up to $30,000 a year each. It will pay a fixed interest rate and a variable rate for inflation. These rates change on May 1 and November 1. Not a bad rate for nowadays but it pays a fixed rate (if we have deflation its good) but if the economy recovers (the inflation part its good). You must keep them for 1 year so do not park any amount of money there that you would need immeadiately. If you keep them for 5 years there is no penalty for withdrawal. The penalty is three months of interest.
I feel that the inflation rate multiplier would be around 1.2% for a total of 2.4%. Then add in the fixed rate and if you purchased them in today, April 2004, the rate that will be earned in May should be around 3.5%. BUT THESE ARE JUST MY PERSONAL OPINIONS.

For more information go to:
http://www.publicdebt.treas.gov/sav/sav.htm

For the interest rate go to:
http://www.publicdebt.treas.gov/sav/sbirate2.htm

This is if you trust the government at least at the start of deflation. I think it is safer than the banks.

I am not saying not to invest in other things or what I have stated, this is up to you. Please do some homework on the internet, get a few good books etc. DO NOT GET BOOKS BY ROBERT KIYOSAKI my opinion of these books are they are more self help than any thing else. I purchased some of Kiyosaki's books and I wasted my money.
Try authors like Robert Prechter, some books or web sites that are targeted specifically for the areas that you are looking to invest. Check the web first before investing you money into the books.
Robert Prechter's web site
http://www.elliottwave.com/

You wanted an opinion, and a timble full of information there it is.

Some may disagree with me and some may agree, that's fine. But if you want to sleep well at night, do the reasearch.

Roy

Posted by: Roy at May 1, 2004 10:09 AM

Thank you for the advice Roy. We have thought about putting some money into a bond. And you are right, the first thing we will do after our closing date is get out of any outstanding debt.
We don't have much, but it's gotta go.

I'm still wondering about gold. I expect things economic to turn sour after the elections in nov. Potentially a surge (small? big?) in gold, though who knows? I figure, WORST case scenario, after our year or two is up the price of gold is about the same; or even a little less. This would be less than thrilling of course, but it wouldn't be the end of the world. Perhaps an acceptable risk against the possiblility that gold will rise moderately... or more.

But I know how manipulated and contrived the gold price and market is. I wonder how much of a chance there is that the price might go into a slump in the next year or two. Certainly the past week has shown how volatile even gold can be.

I suppose ultimately since I wouldn't put everything into gold, I could ride out a slump, but I'm still not sure if I should risk it in te first place. Any thoughts? Dru

Posted by: Dru at May 2, 2004 02:47 AM

Dubreuil isn't the 5% tax on money the same as inflation? He's right, inflation makes people want to buy real goods and not use money as a store of value.


Posted by: steve at May 2, 2004 06:12 AM

The alchemists were right. It is possible to turn lead into gold (in a fusion reaction). That's where gold originally comes from.

What if someone found a cheap way of doing nuclear reactions, using low energies, that worked.

http://www.physicstoday.org/vol-57/iss-4/p27.html

I'm not saying that we have it today, but can you imagine how that would affect the central banks if one day someone could do this successfully?

Posted by: steve at May 2, 2004 06:29 AM

"I have been listening to a handful of deflation predictors -- the same people -- for over three decades. Their arguments do not change. The inaccuracy of the prediction also does not change. Using the Median CPI as the standard, the prediction has been accurate for three months out of 435 months since January, 1967, the year that I heard J. Irving Weiss forecast the coming deflation at a Harry Schultz conference." Gary North

Posted by: Toomie at May 2, 2004 09:22 AM

Toomie,

Deflation comes along only every 70 years or so, during Kondrateiff Winter. The last occurrence in the US was in the 1930s. Thirty years is too short a period to expect another period of deflation. We are due for another period soon, regardless of the untimely predictions of others for the past thirty years.

Posted by: Spica at May 3, 2004 07:13 AM

Toomie,

Deflation comes along only every 70 years or so, during Kondrateiff Winter. The last occurrence in the US was in the 1930s. Thirty years is too short a period to expect another period of deflation. We are due for another period soon, regardless of the untimely predictions of others for the past thirty years.

Posted by: Spica at May 3, 2004 07:14 AM

Toomie,

Deflation comes along only every 70 years or so, during Kondrateiff Winter. The last occurrence in the US was in the 1930s. Thirty years is too short a period to expect another period of deflation. We are due for another period soon, regardless of the untimely predictions of others for the past thirty years.

Posted by: Spica at May 3, 2004 07:16 AM

Toomie,

Deflation comes along only every 70 years or so, during Kondratieff Winter. The last time deflation occurred in the US was in the 1930s. Thirty years is too short a timeframe to expect to see a recurrence of defaltion, despite the predictions of others. We are due another episode of deflation soon. It is the only way excessive debts can be purged from a free market economy, which is necessary before future growth can resume.

Posted by: Spica at May 3, 2004 07:24 AM

Dear friend. There was a Gold standard in the 1930s. Drawing historical parallels between periods with a gold standard and periods with paper (fiat) money is going to lead you to many false conclusions. Paper monetary systems always inflate. When it comes to paper money, inflation and deflation aren't symmetrical. That is one reason you never hear of hyperdeflation or runaway deflation.

The only thing we are due and can count on is the gradual and inevitable cheapening of paper money. That you can take to the bank. Regards

Posted by: toomie at May 3, 2004 07:49 AM

Hello toomie

It is an interesting point that 1930 existed a gold standard. I often studied about it. All the Doomers say "the same as in the 1930s will happen". But this is not sure, since the central banks are all SELLING gold. There is no gold standard anymore.
Today, the banks can print and print as much they want. The doomers then say "what if no one takes this money, or just puts it under the bed? Then it would have no effect." Well, then just print more!!!
The financial survival strategies are much different in a system that goes directly to hyperinflation than to deflation.
Do you have seen any good article about this "directly to (hyper) Inflation"-scenario? Would be nice.

Best wishes to all
Ben

Posted by: Ben at May 3, 2004 01:30 PM

Economic speculation is just a whole lot of hoo-ha.

Tomorrow could bring the invention of a virtually free source of energy.

Or tomorrow could bring nuclear holocaust.


Wonderful time to be alive, isn't it?

Posted by: Karmic Cancer at May 3, 2004 09:42 PM

Don't worry that other people don't know you; worry that you don't know other people.

Posted by: Powers Dave at May 3, 2004 10:42 PM

I've read some comments about Kondratieff but don't know too much about how he came to his theories. The important question is:

Did Kondratieff calculate considering a currency backed by substantial gold reserves?

I think deflation has been or still is a threat, otherwise the Fed would not be pumping money out like crazy.

Despite of its currency not being backed by gold, Japan still managed a deflationary-like environment. No, its not exactly like it was during the US Great Depression. But probably still tough for the average Japanese though...

I agree that we will eventually have much more inflation. Although, I ask myself how much more can people buy when they already have so much stuff(?).

Several of the most popular shows on cable involves decluttering, re-organizing, or remodeling one's home. Incidentally, almost all of them end up throwing excess personal belongings (hint, hint).

The problem today in the US is NOT having enough space in one's home but rather having too many things. I recently gave away a roomful of items I hadn't used in awhile. You will be amazed at how much more room you have. So don't buy a bigger house, get rid of useless stuff!

If you haven't used, worn, utilised something in one year give it away to charity! Declutter! Reorganize! Get rid of stuff!

Ask yourself:

With real estate so expensive, why is all this junk taking up valuable space? Its not the item that is a luxury but the space.

Posted by: John at May 4, 2004 09:27 PM

Then be careful about buying more stuff in the future...making sure you have room for it and that you will achieve or at least almost reach full enjoyment and utility of these items. Just my two cents...

Posted by: John at May 4, 2004 09:30 PM

Sorry about the multiple posts the other day. User error.

Toomie makes a good point about the gold standard. This whole thing is looking more like the 1970s than the 1930s. To begin, Nixon's first budget was balanced, as was Clinton's last. Then Nixon closed the gold window in 1971 and the dollar was allowed to fall. Inflation kicked in, and probably cost reelection bids for both Presidents Ford and Carter (WIN - Whip Inflation Now, stagflation, malaise, misery index, etc.) Interests rates climbed into the double digits and gold soared to heights not seen since. Stocks did not pass their 1966 highs until the 1980s, marking time most of the way, kind of like the Dow's struggle to keep its head above 10,000. Who knows how many years before NASDAQ will surpass its absurd highs of 2000?

The big question regarding hyperinflation and devalued dollars - will banks accept in repayment for mortgages and loans dollars so cheapened that a typical mortgage balance is equivalent to the price of a night at a hotel? If so, then the washing away of the debts that Kondratieff Winter brings could be accomplished by simply and easily repaying them with those cheap, plentiful dollars.

Posted by: Spica at May 5, 2004 06:16 AM

'k
The basic points remain. Debt grows and debt/revenue grows ... In the mean time Assets are at record time high ... So you can expect that at one point a crisis of solvability will happen. Lenders will fear : will we get the money back.
It can happen if the price of assets fall (debt/assets would boom) or if revenue goes down ... for instance inflation in prices does not convert fast enough in inflation in wages ... and consumers spend less ... Or there's an economic contraction at the end of the next business cycle ...

But you must admit that however you put it and measure it, debt can not grow forever especially debt / revenue ... (Just as asset prices can not grow forever until they yeld nothing)

So... once you admit that.
There is either
inflation and debt repaid in devalued money.
or
Bankrupties and deflation.

My opinion is of course that both will happen. And that deflation will strike first.

Now for the technical details... The reason why just printing money does not work is that for 1 dollar printed, much more is created in the lending process (say 5) (ratio of M1 to sth between M2 and M3) ... so you can not compensate a credit crunch by printing more. What you do technically when you are a central bank is buy assets, try to lower long term interest rates ... But the thing is when asset prices are too high for the market ... All you can end up too is the central bank buying all the assets of the country. (this is just an absurd situation to show that the government bodies can manage the flows, speed or delay a recovery or whatever ... But they can not stop a flow forever, when prices need go down because they have gone high too long the central bank can only delay the fall, and this role is important indeed, avoiding panic is important, but it can not make things happen alone)

Posted by: Dubreuil at May 6, 2004 05:10 PM

Enjoy learning about historical monetary systems and their failures from Galmarley's History of Money series, including:-

John Law - A short history of a central banker's spectacular fall [1720AD]
Athens - Housing the Gods (on borrowed money) [500 - 300BC]
Rome - Monetary Expansion & Republican Militarism [200BC]
Chinese Credit Derivatives after Genghis Khan [1200AD]
Why Sweden's Central Banker was Beheaded [1719AD]

Posted by: From SafeHaven at May 7, 2004 02:41 AM

A central bank has a choice. It can target either the price of money (interest rates) or the supply of money. In choosing what it targets it forfeits control over the other. Traditionally central banks have targeted the price of money and allowed its supply to vary to meet market demand. But there are occasions when they have targeted money supply. The current BOJ and the early 1980s Volcker Fed being the most prominent recent examples.

To the deflationists the idea that a central bank can target the supply of money seems absurd. But the truth is they can do it if they want to. And history has proven when push comes to shove they want to.

So it follows that the Fed is powerful, but it isnt all powerful. It can control money supply, it can control nominal growth/demand, but it cannot control relative prices. And that ulitmately is there downfall.

Their current actions, for instance, might help the equity markets, but they will probably help gold and other commodities even more.

I have no idea what will happen in the future. But I would confidently wager that the value of the dollar will be going down.

One final word on deflation. The idea that a bankrupt country's credit (money) would go to a premium (deflation) is absurd.

Posted by: Toomie at May 7, 2004 07:42 AM

It is assumed that higher interest rates cause a contraction of the money supply because it discourages consumer borrowing. If interest rates rise, but the government continues to borrow $100's billions for the war, then the money supply will not contract.

Posted by: steve at May 7, 2004 12:36 PM

Toomie, I don't get your point.
The fact that a credit crunch creates a deflation is basic data of economic courses and history.
When banks stop lending (because 1 they expect that their borrowers will be unable to repay 2 they don't have enough central bank money to lend (this can happen for several reason, including people holding cash instead of deposing their money) and or borrowers stop borrowing because (1 real interest rates are too high 2 they fear being unable to repay 3 there is no good investment to make right now, better postpone ...) Money supply crunches...
And the figure may be well well above the 100's billions used for the war.
Nothing can stop a confidence crisis. And how can you trust anyone who'd be patching holes in a boat by creating other holes ...

You could imagine of course the central bank creating tons of money, buying all the assets of the country, lending to all. This way you would jump to inflation and the debt and over priced assets problem would disappear into inflation of goods.
The problem here is the redistributive impact of inflation. Those with assets and the lenders (banks) will from the start oppose an agressively inflationnist policy from the central bank... And this will create the deflation.

You have to realise this : All those holding assets live on an illusion of richness. All the assets are probably overpriced by 100% (they are 50% worth less than they look)... In the mean time, probably 50% of the debt currently holding will never (never) be repaid, at least in real terms...

This is what you get if you move the stock prices back to normal and same with housing.

So the question is only how to move back to normality. One way can be a fall in the nominal price of assets, bankrupties and for a time being fall in general level of prices.
The other way is a move of general prices up while asset prices remain stable.

But if you hold assets, and have lent to lots of people why would you accept inflation unless you face... FACE deflation ?

For 20 years the central banks have fought inflation. For 20 years they have fueled a major bubble in the financial sphere. Inflation has not yeat risen to 3% and there's talk to fight it, in this very context of overindebted economies... There's something wrong here.

Posted by: François Dubreuil at May 7, 2004 04:26 PM

Well folks ... Any comment on the april figures for employment ? This time no doubt, employment is up, so are working hours so are wages (0,3%) (that's 3,6 annually) ...
So ...
what if all that's ahead is a slow burst of the financial bubble ? What if we're heading for our best years economically, while asset plundge and inflation soars ?
Any comment ?
How far do you think inflation needs to go to reduce the debt burden ? 6% annually ? How far dya think The fed is ready to let it go ?

Posted by: Dubreuil at May 7, 2004 10:22 PM

I really don't know where to start. You say:

"The fact that a credit crunch creates a deflation is basic data of economic courses and history."

I would love to visit the ivory tower teaching that.

I guess when Argentina is short of funds and can no longer peg its currency to the dollar, the end result is deflation in Argentina.

I guess when Trump can't make his debt payments people start rushing to buy his credit because deflation in terms of the Donald Trump currency is around the corner.

Argentinians would be elated and surprised to learn this. As would be Donald Trump!

Also if what you claim as fact is true then history must be replete with examples of surviving and appreciating fiat currencies.

Posted by: Toomie at May 8, 2004 07:07 AM

I ask everyones indulgence on a rather long post. I view the following passage from Ed Bugos as an excellent introduction to the monetary matters we are about to face. It was written July 2002:

"I think most everyone perceives this debt issue as ultimately deflationary due to the quantitative aspects of currency and money that determines their values. As the credit cycle busts the money supply is expected contract, etc. Only, the proper phrase should be "currency supply," not money supply, because applying the latter term to M1, M2, M3, etc, is what convinces us that deflation is the natural consequence to an unbridled credit expansion, as if the value of the so called money only depended on its supply. If it did, the Fed would've been out of business long ago.

Thus, as these aggregates decrease in quantity we are persuaded to believe that the 'money' has become scarcer. Some of us contend that as the deflation becomes an increasing threat the rate of growth in this 'money' supply will be forced to grow and eventually result in hyperinflation as an unintended overreaction. We don't really disagree with that scenario, but I think it will happen as the Fed becomes increasingly desperate. Not about deflation, but about the value of the currency its banks produce in profligate quantities.

Mises showed years ago that the monetary aggregates were really only money substitutes. The value of those money substitutes is what we believe will fall against most everything else, and the supply of them will not matter because people will simply not want them (remember all talk about supply and demand is relative to each other) if they no longer qualify as money. An economy has certain requirements of money, and at some point during any inflation in it the substitute currency no longer does that job. The money is no good, if you will.

Despite the fact that process is ultimately set off by inflation it will matter increasingly less that the supply increases or decreases except to the extent those changes sway or lag a deterioration in the value of the currency or the demand for it relative to whatever qualifies as real money. In the end, it's all about the value of the dollar, not simply its supply, which is why I have become so convinced the inflation breakdown is upon us - almost regardless of what happens to money "supply."

The reason is that the value of the assets that kept demand alive for the currency has been falling for 2 years, finally uprooting the value of the currency itself. The next stage (after the attempted manipulation to save the day) is panic. And not just by the market. But predominantly in the highest offices of our land, when they find that the value of the dollar lies outside their control and when they are convinced it will devalue regardless of what they do. At the moment I think they still believe they can do something to prevent that outcome.

I believe the final decisions that will be made will involve creative ways to increase the so-called money supply for many reasons. But it will I think least involve desperation about deflation at the time. It will probably just be simple blank desperation - the kind that comes when you don't know what else can be done. In other words, the kind that will result when they realize that even less of the currency won't help it from becoming worth less.

Imagine the value of your own 'money' falling and there is nothing you can do about it. I mean nothing. Assume you have zero options except to control the supply of it, but you know that even decreasing its supply will not support its value. You might find that a large part of its utility was in how generally available it was and that by decreasing its quantity you'll simply help it become less desired, if anything.

That's what I believe the Fed will one day feel.

So they will increase its supply, and increase it, hoping that they can still come out ahead. At that point in the monetary cycle you've got something that looks like 1920 Germany."

Posted by: Toomie at May 8, 2004 07:17 AM

Toomie,
I can see your case for inflation, however, I have some problems with it.

The money supply can only contract when loans are paid back or people or businesses file bankruptcy (default).

The expansion of the money supply can only expand if people and businesses borrow money. This is based on the multiplier effect.
A multiplier effect question: If you have $100 and the Federal reserve rate is 10%, How much money does that 100 generate? See one of my previous posts for the answer.

Nextly the 1920's Germany had hyperinflation because there was virtually no demand for German products abroad because people were pissed at them for WW1, Additionally, they had huge payments they had to make for loosing the war. This is part of the reasons for hyperinflation in Germany.

The other tools that the Fed has is during the panic, I agree with Robert Prechter in his book Conquer the Crash, that the government will 'take' what is left of the pension plans, 401K's etc. and place them into government bonds. So anyone with a retirement account will be totally in safe, backed by the government US bonds. The social mood will change were people will celebrate the government for doing this. See prechters book for more information.

One last word, Thank you for your posts toomie and keep it up. It is nice seeing a difference of opinion and your opinion is very interesting and seems to get many responses that are very interesting too.

Posted by: Roy at May 9, 2004 01:33 AM

TOOMIE HAS SETTLED THIS BY ONE SENTENCE......

"The idea that a BANKRUPT Country's Money (credit) would go to a premuim (deflation) is absurd".

DO YOU KNOW ANYONE, OR ANY COUNTRY, THAT AFTER GOING FLAT BROKE SUDDENLY HAD GREAT BUYING POWER OR THEY SUDDENLY HAD EVERYONE FIGHTING TO DO BUSINESS WITH THEM? Please name one........

KK :o)

Posted by: Ken Knight at May 10, 2004 09:29 AM

I've not spoken of exchange rate.
There is no reason that deflation should by itself lead to a higher exchange rate.

Deflation can be world wide. Historically it has been the case in the 30's.

However, during the 30's it was more or less the other way, I know of many countries who after wanting more buying power ended up being flat broke... This is more or less the story of the 30's. Great britain wanted to keep the value of it's currency. USA helped and let a bubble appear in their country. Then came the crash.
And of course during the 30's lot's of gold came inside the states. with lower prices lot's of US goods were cheap and ready for export. The country was exporting deflation.

Technically.
If you raise interest rates you have both bankrupties and a higher interest rates.

This is once again a basic relation in economic theory and practice.

Now Toomie seems to wonder why it does not apply to argentina or donald trump.

1 Donald trump is an easy case
Donald trump does not issue a currency. Supposing some people were using some of his bonds as a currency. Once he is bankrupt they are worth nothing. May be yet they can hope to get some refunds out of the selling of his assets. So they may stay on the market at a low price.
It is an external crisis.

2 This is the same with argentina
argentina had a debt labeled in dollars. Argentina is typically a case where they obeyed the IMF and peg their currency to the dollar through high interest rates, thus killing the internal fuel of the economy and creating a boom in the external debt. This lead to a bankruptcy.
Once they release their currency, of course inflation restarted.
But you have to realise that it is an external crisis. If you have debt with other countries it does not create money within the country the way debt within the coutry does, because a great part of the money you borrow is sent to that foreign country you borrow from (you borrow to buy stuff from that country)...
IN fact lot's of funds were moving out of argentina to the US, and lot's have moved back since then.


3 So if you want to understand the US (and any western country) problem ...
The US has an internal debt labeled in dollars.
Imagine the workers of donald trump were using an internal currency to lend money to one another.
Trump makes lots of it available, 10% of the wages for instance are labeled in trump dollars. Trump dollars can be used to buy trumps goods and can be lent. Lots of people borrow in trump dollars. Huge trump dollar creation. And you can find that in many places, you can not buy for one trump dollar the same worth of product than with a traditional dollar.
Come a lay off. Lot's of people can not repay their debt, lots fear the next and save or spend immediatly. Nobody lends anymore. Fewer trump dollars in circulation. price level off in trump dollars.
Come the final bankrupcy of the company. Trump dollars are worth nothing (huge inflation).

So to sum up, you have to get the difference between the bankrupties of the agents and the bankrupcy of the country.

Bankrupcy of the agents destroys the money supply and leads to deflation.
Bankrupty of the country lead to a suppression of the external worth of the currency.

In soviet time, the new soviet money was worth nothing outside the country because the soviet people had refused to repay the debt herited from the tsars ... But that same soviet money was still available and very well usable within the country.

So... You can have
bankrupties from the people and deflation
Bankrupcy from the state and devaluation (inflation in foreign goods worth, or sudden disappearance of the foreign goods)

Both can happen together or separately.
State bankrupties are rarer, because a very often they have enough people to buy their debt in their own currency. Right now, all the US debt is labeled in Dollars and this is good, since the US government does not really has to fear being unable to repay it's debt.
If not enough savers come up to invest in US bonds labeled in dollars though ... and if Bonds have to be labeled in a foreign currency... you may start to worry.

Posted by: dubreuil at May 10, 2004 11:05 PM

I keep seeing posts that the money supply must deflate if interest rates go up, but that assumes there aren't other ways to create money.

I'm suspicious that the government might be "printing" money directly to finance the plunge protection team and possibly for funding black ops.

Stock is a form of currency that US companies can buy things with including foreign companies.

Finally, the US government is borrowing for Iraq no matter what. Those billions have to dwarf consumer borrowing.


Posted by: steve at May 11, 2004 09:32 AM

http://www.eldoradogold.net/cornered_rats_030326.html

Posted by: steve at May 11, 2004 09:35 AM

Gang,

Has anyone here used Investment Rarities Inc., the co. Dep 2 website has a link to, to purchase gold or silver? I am looking to make a purchase, but, I am worried of a scam.

-Dan

Posted by: Dan at May 11, 2004 01:02 PM

For 4 years, stocks have been underperforming any other assets, including cash.
How long do you think it will take before people realise it and invest in other stuff.
Since almost all asset prices will probably move down compared to goods (inflation or deflation will have no impact on that) : Expect the market for luxury items to boom. Those with lots of money will move out of all the asset markets and spend in luxury items, jewelry, trips.
Prepare for that great reversal, john doe will save : ie repay his credit card bills as weel as he can.
And rich ones will spend like crazy all that they have since they know the worth of what they have is doomed to fall in real terms.

Posted by: DF at May 12, 2004 12:28 AM

Dan,

Go to certifiedmint.com or call their phone number 1-800-528-1380 and ask for Bill or Mike Haynes...

You will not find better prices and the service is the best. I've tried many, however they are the very best. I've nothing to gain, just trying to help..

regards,

Ken Knight :o)

Posted by: ken knight at May 12, 2004 02:42 AM

Steve,

Man I think you are on to something, I have felt for a long time that they were printing when they want and how much they want. We may never know.

Heck, they have lied about EVERYTHING else, why not the real numbers that give the amount of funny money in print!!

They have trashed the laws of the land to their own benefit, when we try and stand under those same laws we are being "UnAmerican" PLEEEEEZZ !!!

Regards,


Ken :o)

Posted by: ken knight at May 12, 2004 02:46 AM

Come on guys, have a look at the size of M3 and M2
and compare it
I can do it for you
jan 2003
M1 : 1218 billions of dollar
M2 : 5838 billions of dollar
M3 : 8550 billions of dollar

And please remember that real cash in the form of bank notes and coins itself is only a fraction of M1 (which includes all the cash on checkable deposit in your bank account) ... Say 30% (I don't have the real figure, but I believe 30% clearly is an overestimation.
So you have say 400 billions of dollars in bank notes and coins.

If following a debt crisis, M3 is to fall 10 % each year, that means 800 billions of dollars, twice the total amount in present circulation.

So please be realistic. Printing money is no solution.

The number one indicator to look at is the growth of the ratio debt/revenue. If it moves up and up, it means it will have to go down. And unless it goes down through enduring real inflation (which we've not seen for 20 years), it will go down through bankruptcies and then a fall in the general level of prices.
Nothing can stop the need to reduce the debt burden, just like nothing can stop the fall in the relative prices of assets to goods.
We overspend is the one and single problem, we act as if we were richer than we are and live on that illusion.

There is no specific evil to blame, except those may be foolish enough to pretend that the liberation of the mobkets would lead humanity to an enduring progress.
Delusion is the direct product of illusion. Excess pessimism is product of excess optimism.

What we have now, how we behave now all, has no need nor any right to linger on ... On the opposite.


Posted by: Dubreuil at May 12, 2004 08:52 PM

James Cook, owner of Investment Rarities, has an excellent reputation and has been in business over 30 years.

Posted by: Colin at May 12, 2004 11:16 PM

The major averages are in a 17-18 downcycle after a 17-18 year upcycle from 1982-2000. Bubbles/very long term cycle highs occur about every 35 years: 1897, 1929, 1965ish, 2000.

http://www.JoeFRocks.com/

Posted by: Joe F. at May 13, 2004 02:03 AM

First lawsuit against the Depository Trust, also known as "the tower of power" for naked short selling:

http://www.rgm.com/articles/nanopierce.html

Posted by: steve at May 14, 2004 01:22 PM

Cede and Co. is the DTC's nominee. Cede (look up the meaning of to cede in a dictionary) are the actual owner of $24.6 trillion worth of stock and are the major shareholders and control vote in most public companies.

If you own stock, you should learn the difference between owning stock in street form as a beneficial owner (a trust relationship) and actually owning the certificate as the actual owner.

Did you ever wonder what happens when you send in your votes in a public company? Those are only instructions to your broker who gives instructions to Cede as opposed to actual votes. If you own fake counterfeit shares (see lawsuit previous), then they toss your vote in the garbage.

Posted by: steve at May 14, 2004 01:31 PM

The essence of the lawsuit is that the US central clearing house for stock has "kited" share ownership because they control the books and make a lot of money by doing it. Many people can own the exact same share.

Their nominee, Cede and Co. is the ACTUAL owner of your street name stock.

The DTC would scale your vote if stock has been kited. If four people own every share, your vote would be worth one quarter of what a certificate owner's vote is worth.

Here's the deal - if multiple owners try to get the same certificate, this is equivalent to the proverbial run on the bank. You have zero rights as stock ownership is governed by state law and the SEC won't intervene.

A trust relationship is contract law and can only be enforced by suing for damages.

This opens the DTC up to an avalanche of $billions in lawsuits which could dwarf the derivitave issues.

This issue is HUGE and the media won't cover it.

Check out http://www.jagnotes.com

These investors can't get their dividend because they don't have ACTUAL ownership of shares and Cede and Co. sold them kited stock.

This is a HUGE scam.

Posted by: steve at May 14, 2004 01:57 PM

http://www.rgm.com/articles/financialwire.html

Posted by: steve at May 14, 2004 01:59 PM

Again I will let Ed Bugos do my talking. More later:

"Debt can grow indefinitely in the post gold standard era in dollar terms unless the central bank itself abandons the policies producing the boom in credit. This is the truth that the bull market in gold will one day reveal. People must not believe that the policy of inflation is endless. Remember that sentence. Its veracity is the absolute key to opening the bull market in gold up wide! The Fed works hard at keeping you from believing it. I bet that Sir Alan is utterly joyous when people all on their own come to the conclusion that a contraction in the money supply (when there is a fully equipped engine for inflation and no gold standard) is in the offing - and one that is uncontrollably wild at that! You can't help people even if you try.

The line that is crossed when people abandon a particular paper money, according to von Mises who lived through a few such cases, is precisely the discovery or realization that the policy of expanding paper notes is endless. We have had a century of this and still people can't reckon it's endless. But it is this reckoning which is the difference between what really ultimately occurs and what occurs according to the laws of physics - that is those which exclude the interjection of human valuation judgments.

Just because debt levels are big does not mean that they have to one day contract. This is the whole argument against fiat money systems. If it did, there would be no point in owning gold. You could just buy dollars near the end of a boom and hold them through the bust and do just as well - even if gold was the only thing that went up you could do just as well owning dollars if everything else went down. Gold would never receive a premium over the other commodities, which we know is not the case."

Posted by: Toomie at May 15, 2004 09:15 AM

The idea that money supply can only expand with new debt is not accurate. The Fed can monetize any asset including outstanding debt and increase the money supply.

I don't know why this concept is controversial. The Fed has an unlimited balance sheet. They can "print" all the money they want and buy "things." That they are not targeting the supply of money right now is a choice. They could target the supply of money if they wanted to.

Posted by: Toomie at May 15, 2004 09:38 AM

I meant that entities other than the Fed could in theory enter money into the economy. There are rumors of both a "plunge protection team" which could print money directly under order from the president to purchase stocks without necessarily recording an offsetting liability with the Fed. IE. a way to print money without spooking foreign investors.

Also, there are rumors that the bureau of engraving printed money for the CIA for blackops in the middle east without recording the serial numbers.

These activities could occur even if interest rates were 20%, so you can't automatically correlate money supply to interest rates.

Even in low interest environments, the money supply can stay low if money is pulled out of the banking system and put into non bank assets like stocks.

That's why the US Fed. has bought into the Depository Trust and why they are pushing the SEC to get rid of physical stock certificates. Read my previous post for a huge scandal that isn't making the news.

Posted by: steve at May 17, 2004 09:33 AM

"Debt can grow indefinitely in the post gold standard era in dollar terms unless the central bank itself abandons the policies producing the boom in credit. "
Fiat system is nothing else than a floating money compared to gold, it's the same as changing every day the amount of gold your money is worth. The situation is not that different with the 30's.
The central bank itself will abandon the policy of producting the boom. It will because it will be told too. It will because inflation in the price of goods will frighten the asset owners, and all will fight to keep their "real" wealth. Thus doing they will of course cause the bankrupcies that will lead the world into a phase of deflation, followed by inflation.
Monetizing assets can only work as long as there are assets to buy.
Imagine a situation where all the assets are in the hands of the central bank, all the houses and all the stocks. The central bank has created billions of dollars and the people won't spend it on assets, won't borrow a dime. They only store the cash and wait for asset prices to fall : (through inflation in goods, deflation in asset prices or both)
One way or another the situation has to move back to sustainable debt levels.
Wether it is through inflation and lower real debt loads, or bankrupcies, or disparition of the currency ... Can not be planned entirely yet.
But :
given the Pro stock holders stance of the central bank, at the price of the overall stability of the finance industry ...
Given the still strong anti inflation bias
Given the already started deflation in asset prices with a PER still at around 35 and a track history of 4 years with no gains ...
Given the inability of workers to negociate real wages growth ...

All I can see is
stocks falling revealing some overleveradged companies, and other dangerous accounting practicies ...
A bubble in housing prices fueled by this fall in stock prices for another 6 months - year.
And deflation ahead.

The main fuel of inflation is union power. That one is dead.


Posted by: Dubreuil at May 17, 2004 10:08 PM

First the deflation argument was the Fed couldn't stop money supply from contracting. Now we are told "The central bank itself will abandon the policy of producting the boom."

And they will do this because of inflation!

OK

Theoretically they can do that. But as Sean Corrigan puts it:

"It is true that a central bank could begin a policy of severe restrictionism, raising short-term rates and limiting, even reducing, reserves in such a draconian fashion that credit becomes both more scarce and much more expensive. Thus implemented, the bank could indeed occasion a round of defaults and deferments, asset sales and margin calls, banking failures and a seizure of the credit system, much as Prechter describes.

However, we must ask ourselves how likely it is that any presently instituted central bank, or political party – incumbent or otherwise – would actively promote such a policy, or, having stumbled into it, would persist with it.

I trust you would agree with me that this would be an almost unconscionable prospect.

Indeed, the recent history of bail-outs, emergency rate cuts, the instant provision of vast swathes of ‘liquidity’, and other such interventions undertaken by the central banks in the face of anything from the Mexican crisis of late-1994, through the Asian Crisis of 1997/8, the Long-Term Capital Management fiasco, the Dot.com bust, Y2k, 9/11, and so on and so forth, argues strongly that whenever the US financial system (in particular) is threatened, the floodgates are opened without further ado, even if ‘rules’ have to be infringed and the dictates of best practice eschewed in the process."

So predicting deflation has been wrong in the past, wrong in the present, and to most logical people most likely wrong in the future.

Posted by: Toomie at May 20, 2004 07:48 AM

"The main fuel of inflation is union power."

I respectfully disagree. The main fuel of inflation is money supply exceeding demand for money.

Posted by: Toomie at May 20, 2004 07:54 AM

Hi toomie, I know you disagree. You say.
"The main fuel of inflation is money supply exceeding demand for money."
Well. There is a problem here. Always the same. Defining terms. Inflation, money, money supply and demand for money.

I've been talking of inflation in the price of goods.
Supply and demand for money are almost impossible to measure.
What you can do is look at the stock of money available. And say it is the supply of money.
And then you can say that the money must be used for other things, and all the real things are the source of demand for money.
But this of course is biased. First because lot's of people like to have money in itself. They stockpile money. How do you trace that demand ?
And then you have the variations in the "velocity" of money.
You may know the relation
PM=Yv
Where M is the increase of the stock of money available (called supply). Y increase of goods available (say GDP) P level of price and v speed of circulation of money.

As you may have seen for the last 15-20 years or so, inflation in the price of goods has slowed, while supply of money has kept right on.

WHY ?
There's different ways to phrase it.
The first is technical. Velocity has slowed. But it's rather strange, because technically there is no reason that one unit of cash would lead to less transaction now than before.
The real reason is that the cash has been sucked out of the real market into the financial market.

So another way to phrase it is to say, that what has not been traced is the inflation of asset prices. Asset prices (housing and even stock shares) should be within the inflation figure.
See it this way a company had a given worth, you want to buy it to do whatever pleases you with it, it's price has doubled. THIS IS INFLATION.

THEN accordingly,
If you include asset inflation in the measure of inflation, in that case and in that case only, you have a link between inflation and the money supply.

Finally,
if what you care of is the REAL market, the goods in hard form, the things you and me buy to live out, not the investment market, the things we buy to better (or worsen) the future.
In that case the increase in the stock of money is not a good predictor of price inflation, as it has been proven in the last 20 years.
There is however a very good predictor of price inflation it is labor power.
When labor can price up it's labor, companies are faced to lower margins and tend to rise price. That's an inflationist environnment.
When labor can not price it's labor, companies move to ever lower payed workers, lower its prices, that's a deflationist environment.

And I guess you can see the link between the 2 explanations now.
As long as consumers can borrow, or work more, spending can remain at a stable or slowly growing level, low inflation.
(you have at the same time, deflationist real factors and inflationist money-asset factors)
Meanwhile rich people get richer, while poor get poorer.
When they start repaying debts, deflation occurs. (conjunction of deflationist real and asset factors)
Everybody gets poorer, though the richest (having more) lose more, but with less pain.
When real factors reappear, if held back by financial factors, you can still have a deflation, but the more you have a deflation, the more severe will be the clashes between labor and companies and the more severe the reduction in companies profit.
If real and financial factors are inflationists, you have inflation.

And this of course is related to kondratiev cycles.

Stays my point. The bubble has to pop. Once stock start falling, everybody realises that their yeld is ridiculous and since only the continuous growth in price may them a good investment ... Better sell.
What can do the central bank against it ? The only way to stop is to provide free credit, if still inefficient, it will need to buy assets ... buy all assets available and monetize them ... and then what ? If no body want's them at their current price ...
Inflation of good's prices needs to find some buying power. IF (bif if) with lower unemployment, and higher oil prices, workers get pay rises, companies move up their prices, and imports reduce because of lower dollar ... Then you could have inflation.
But it is rather probable that a very shaky asset market will see any reduced profit, higher labor unrest has a sign of future reduced profit, and fall... And then with all their might it will be a tough job beeing a central bank, trying to convince everybody of the need to borrow. Because borrowing and lending implie either
a that you believe what the asset you build, and those you hold, will gain in worth, at least will not fall drastically
b that you believe future revenues will improve or stay the same and not fall drastically

Posted by: Dubreuil at May 21, 2004 05:27 PM

First of all, I must say that english is not my first language, so sorry if I make any mistake. I´m surprised to find somebody near my "mental twin" in this forum. This is Dubreuil, I agree with his opinion in almost everything that he says. The point is: is not possible to flee from debt printing more money when the total amount of that debt in relation to GDP (what a country is able to earn) is beyond a critical amount. When this critical amount is surpassed any increase in debt levels generates an ever increasing deflationary feedback, more money than is generated by growth is put aside to service debt. When growth stalls (money -M3,M1-that is increasing is heavily related with growth) the economy slumps. So you need first to stop M3 (debt) from growing and then to inflate (increasing M1) to get a inflationary solution from this jigsaw. Deflation comes first and inflation makes the rest of the work needed to erase debt.

The money that is printed and "free" is reflected by the M1 number, and this number is well below the total amount of money that the economy uses like "fuel" to grow, this is the M3 number and is made up mainly by the amount of debt. Thus US economy is fueled by debt, but this growing debt is leading to an ever decreasing velocity of money. Money is increasingly storaged and more free money only makes the amount of debt (storage) to increase. This is not the way to escape deflation. A proactive policy is needed now, and first comes the jawboning of the FED, then come the hikes of rates to make the asset speculation a less cheap task.

Maybe deflation fears are not so near now, but "the money from helicopters" of Bernanke is not morally nor practically feasible, is not a solution for deflation. So the FED must pull in the reins to avoid a increasing speculation and carry trade.

Posted by: Nineu at May 22, 2004 07:48 AM

Generally speaking, the fiat money playbook runs on an inflation bias. To think otherwise is to ignore history. They may talk like an economic recovery is underway threatening higher rates, but if what we have is a fake recovery, the Fed action would change fast.

Were an economic slip to occur, I suspect they would stick with their ol reliable playbook. And between the Fed and other potential debt creating agencies an awsome inflationary boom-looking environment can be created. Personally, I believe that's what we are experiencing right now...but that's another thread.

It just seem to me that this inflationary strategy will be followed untill something happens that causes a general lack of confidence in paper money and debt based assets. These mind changing events may be upon us, or they could be years away.

Human nature being what it is, I just can't imagine most people recognizing that our debt levels are too high, so that our collective new found thrift consiousness brings about deflation. Nearly everyone I know believes that our current inflated real estate prices will be even higher in the future. They continue to buy, based on this belief.

Posted by: Brooker at May 24, 2004 01:17 AM

Brooker-
How can people conceive housing and incomes (including equity roll overs into more expensive homes) are not at a disconnect now. Most people in the middle (who's left, anyway) aren't see their salaries keeping up with housing and taxes, let alone energy,food,and medical expenses. Just monthly money management awareness, would make me want to start reading, and turn off the TV (personally don't use mine). Any insights by you?

Posted by: Susan at May 24, 2004 01:49 AM

Inflation and deflation are terms that are best left to describe monetary phenomenon. To use them to describe the supply and demand for labor, oil and other goods or services would devoid them of any significance and would confuse any classically trained economist.

Crude prices going up is not inflationary if other prices in the economy adjusted lower. If the central bank, however, accomodated the price increases by flooding the economy with money and keeping other prices from adjusting lower then higher crude prices would definitely become inflationary.

Now if you priced everything in terms of gold and told me you were prediciting that the gold price of things were to go generally lower I would more than likely agree with you. In fact, a rational person should expect the gold price of houses, cars, tuition, food and fuel to fall in the next decade. But the same rational person should also be convinced that the dollar would devalue even faster.

Also I would caution you in applying the Kondratiev cycle analysis to nominal prices. The dollar is a fiat currency. And the Kondratiev cycle applied to the gold standard era when every inflationary period was followed by a deflationary period and the general price level remained unchanged over centuries. That has not been the case since the end of the gold standard era.

Posted by: Toomie at May 24, 2004 05:51 AM

Why no one should be expecting deflation in the US anytime soon:

Via Doug Noland here is a quote from Federal Reserve Bank of Dallas President Robert McTeer:

"Today, every time we have a major emergency, you know, the first thing we do is get on the microphone and open up - you open up a spigot. I mean look at what happened in 9/11. I mean on 9/11, we just flooded the markets with liquidity because of all the damage in New York, you know, all these New York banks and investment banks, they're receiving billions in payments every day and they're making billions in payments and you know, if they don't receive it they can't make it and so, just a hitch or two in that system can bring the thing down. Well, we just pumped enormous amounts of liquidity in there through open market operations and our check clearing system, which the Houston branch is very involved in, we decided to give credit for checks deposited with us, on the next day when it would normally be done, even though all the planes were on the ground. We couldn't collect the checks but we pretended we were collecting the checks and we gave credit for those checks, created enormous amount of float, which by law, we're supposed to treat as a real cost, to us, but since we're more a public institution than a private institution, we decided not to put our cost situation ahead of the public good, anyway - I'm getting too far off. We know how to handle those things better now, not well enough but not bad."

Posted by: Toomie at May 24, 2004 06:05 AM

Trying to further explain my recent words, I think deflation must come first in the way of not having great increases of M3 and debt in the near future. In the meantime the federal reserve will try to go on with low rates, but also saying to the carry trade community that rates will be raised in any moment. So the FED will try to go on inflating the M1 supply or free and "shot in the arm to the economy (consumption estimulating)" money.

When I speak of inflation or deflation, I am referring to a increase or decrease in money supply. Money supply is the gasoline of the economy´s motor, gasoline that is useful only if it leads to a greater money velocity. If bank notes mushroom in bank offices or more debt and lack of consumption is added, only asset valuation upward movements and the "wealth effect" associated with this movements can sustain the economy. Bubbles can be inflated only knowing they burst and cause pain. When extra money supply is diverted to more debt, above of a critical level debt increases don't add to money velocity, debt becomes more a burden to the economy than a help. Greenspan knows all this, and his efforts will be aimed to a consumption led inflation, I mean money supply that doesn´t go to asset bubbles that make the debt burden heavier. This money supply takes the shape of M1 sustancial increases, but no strong M3 increases.

Prior to a substancial M1 increase, I think people must be relieved of deflation fears by having a "controlled deflation", Greenspan will try to create a slow deflationary environment by baby step rate increases. In the meantime the FED will go on inflating all that they can, eventually the US$ will lose value and inflation will prevail.

When M1 start going up firmly, it will be time to buy gold, in the meantime we can stay in cash or even buy debt cautiosly.

Posted by: Nineu at May 24, 2004 06:59 AM

All this inflation, deflation discussion is fun, but being in cash & not gold right NOW is, I believe, a mistake. Precious metals & their stocks were manipulated down. The stocks went first, cause the insiders knew what was comming. Now, the stocks are up even when gold is not. I believe this means the attack is over for this cycle. Precious metals & their stocks will rise percipitiously as a new buying mania sets in. Only to be zapped again.

My plan is to watch for the next top & sell my stocks as we crest, then to buy back when the stocks show upticks as the metals go nowhere. I never trade my metals hord.

One other comment: the manipulation isn't just in our markets, it is in every fabric of modern life. We are being manipulated by our Big Brother.

Posted by: Brooker at May 24, 2004 11:10 PM

Brooker, I think the deflation issue is the most important point that matters these days. Well understood, it explains almost everything that seems so eerie in the markets in recent years, and this way understanding deflation forces you don´t need to use the word "manipulation" so many times to explain the market´s behaviour.

I think that the Federal Reserve is worried by the money´s velocity, and they want to increase this velocity by hiking interest rates. But interest rates hikes didn´t stop speculation in housing market in UK, so the deflationary forces seem very deep-rooted everywhere. Money suppy that increases debt levels is deflationary, specially if you are staying in very high levels of debt, so better stay in cash when you seem this things happen.

Posted by: Nineu at May 25, 2004 12:19 AM

The massive increase in M3 in past weeks seems to be an attempt to boost the markets into the election? (hey, it's just a theory)

Historically there has been a short lag between M3 inflation and markets rising - the gap is anywhere from a month to 4 months typically.

So with the huge amount of M3 inflation lately I'm guessing there are political reasons behind the move, it's either that or desperation that a crash is imminent (that being the case I'd expect to see more evidence of panic within the establishment).

Cheers Rich

Posted by: Rich at May 25, 2004 04:13 AM

Nineu, market eerieness, IMHO, is explained by the manipulations. Natural correction points are hit or bot, & we all pile on. Expectation of manipulation can make insiders, semi-insiders, & those with a suspicious nature loads of money.

Steve posted a link on May 14, 1:57PM in this thread about a lawsuit revealing one of the manipulation techniques. Plese read this material, it is very important to understand what the insiders have been doing to us outsiders.

Posted by: Brooker at May 25, 2004 09:38 PM

This looks like a great thread. I will come back and write my own comments. I got out of bed to cure a foot cramp and need to get to sleep. BBL

Posted by: mannfm11 at May 26, 2004 06:40 PM

Deviating somewhat from the argument over whether we are going to face inflation, deflation, or both, I have decided to look at history regarding a rare astronomical event that is about to occur.

Transits of Venus are extremely rare astronomical phenomena. That is where the planet Venus passes across the disk of the Sun as seen from Earth. These events occur in a peculiar ycle of 121.5 years, 8 years, 105.5 years, 8 years,121.5 years, 8 years, etc. This cycle can be viewed as twin events 8 years apart, separated by more than a century.

Here are the dates of the past 6 Transits of Venus:
December 7, 1631
December 4, 1639
June 5, 1761
June 3, 1769
December 9, 1874
December 6, 1882

If we view the "twin" occurences 8 years apart and look at economic history for those intervals we find:

1631-1639 - Tulip mania in Holland. No more need be said.

1761-1769 - French and Indian Wars end. Economic downturn in American colonies. Financial crisis in England, which still had not recovered from the bursting of the South Sea bubble in 1720. Also, King George III ascended to the throne. During his long reign he managed to lose the colonies, as well as two wars in North America.

1874-1882 - Aftermath of the Panic of 1873 and the depression that followed, the worst in US history brfore the 1930s. Widespread unemployment as Reconstruction ended and Jim Crow laws emerged in the South. Bitterly contested presidential election of 1876 decided by House of Representatives.

The next Transit of Venus will be on June 8, 2004 a week from next Tuesday. The "twin" will follow on June 6, 2012. If history is any guide, we will be in for a rough ride. Buckle up!

Posted by: Spica at May 27, 2004 07:54 AM

I want to say, just as a "lurker", that this is a very interesting thread and I appreciate the excellent inputs, especially by Nineu and Dubreuil. I would like to see their arguments developed further. A point of confusion is that we are not quite yet a Global Village. Most posts seem to imply that we are all Americans. But if you are in the UK, selling cash and buying gold isn't such an obvious option. The sterling value of gold has hardly moved and it isn't so very clear to me that it will.

Posted by: pseven at May 27, 2004 08:19 AM

There has not been one single instance where a debt laden fiat currency ended up in a deflationary spiral. History is rather clear on this. It has never happened. I wish someone would come up with one example.

In fact, the historic oddity is the predominance of hyperinflations. History is replete with examples.

Never heard of or seen Hyperdeflation. Its not even in the dictionary. Can anyone come up with one example?

Posted by: Toomie at May 27, 2004 08:35 AM

Mises describing the onset of Inflation:

"The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy. But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap pater. Nobody wants to give away anything against them. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It happened with the dollar in 1973. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."

Posted by: Toomie at May 27, 2004 09:00 AM

Toomie, in none of the examples that you have mentioned, the level of debt prevented the easy inflational money to grow - to grow in excess of debt increases plus the extra liquidity needed to service that increasing debt-, but what we can see today is very different .

Always a debt deflation did result after the previous debt bubble, and the only moment of history with today´s debt levels was seen at the first 30's.

The debt bubble of the 20's was deflated by a colossal bankruptcy. Easy money did his work AFTER that debt was erased, creating inflation. Today´s easy money only makes the debt burden worse, this is not a way for inflation to prevail unless Greenspan makes understand pointblank to everybody that "you expend more or you are going to pay your part of the debt of the economy, no individual solution will be allowed". Inflating asset bubbles and debt is no more a solution. A controlled deflation is needed, more money velocity and a higher M1 money supply will help to create inflation, but keeping debt increases stalled in the meantime.

To escape deflation creating an ever ascending amount of debt is not possible. So Greenspan needs to threaten to do what he doesn´t want to do: raise rates, this way debt is more feared and inflation may prevail if created money supply goes toward consumption. Raising rates would unveil the negative effects of current excessive levels of debt, so Greenspan will try every trick before having to raise rates.

Posted by: Nineu at May 27, 2004 11:00 AM

I will keep reminding people. In the 1930s the US and the rest of the world were on a gold standard.

I am still looking for an example of a debt laden fiat currency suffering from significant deflation.

Just one example. Anyone?

Posted by: toomie at May 27, 2004 09:13 PM

Gold standard in use or not, debt in excess must be erased or reduced, or you go into deflation. Debt levels can´t be raised forever, they neeed to be reduced to a more usual level because rain always comes after shine and a recession could be very severe, with no weapons to fight against it, with rates at 1 % if that recession would come now. Overnight rates need to be raised to a 4 % or so to enter in a "normal recovery" phase. ¿Can the Fed do this without creating a recession?. Inflation of assets bubbles are also deflationary by themselves, Japan is an example.

So if you can´t go on inflating asset bubbles and more money need to be diverted to consumption to avoid deflation, how can the Fed get this ¿by putting a gun in every consumer´s head?. ¿Inflate or die?. ¿Dropping money from helicopters?. ¿Asking consumers to go into more debt, when this is hardly possible?. The Fed can´t offer more affordable money than present 1% rate, even if they could offer money below zero cost (0 % rate), it would be a sign of despair to offer rates below what lending money costs.

So when you say that the Fed can inflate money supply at its will, I think this only can happen when more money is in consumers´ pockets, but not money that comes from a raising debt at current debt levels. You need wages that grow strongly , a inflationary (in prices) environment.

Posted by: Nineu at May 28, 2004 10:46 AM

Hey ... Thanks Nineu, for the support and imput.

I would simply add, of course there is an exemple of a country with fiat money in deflation : JAPAN.

Germany is close to deflation.

And may be if we look closely at some asian countries post 1998 we'll see some deflation.
But I'm not sure about that, because what was stopped there is mostly foreign investment, debt to the rest of the world, not inner debt.


Let's compare fiat money and gold standard (in a banking system whith bank notes) :
Gold standard : all money is backed in gold at a centrally adjusted rate.
If lot's of money is created via debt, even if the gold available stays the same, or in tune with GDP, you get inflating prices
At some point the cash holders may ask for gold and trigger a credit crunch, thus lowering money supply and prices.
What creates deflation ? A high ratio between debt and the bank money created and the gold money available to back it.

What do you have in a fiat system.
The difference is that Fiat money can be created at a much faster pace. So you have indeed an inflationnary tendancy (which is good by the way imho because it eases the adjustment of relative prices)
...
But what will create deflation ?
precisely and exactly the same thing. DEbt level and money created there of grows faster than the fiat central money backing it.
At one time, people rush in the banks and ask for bank notes ... Thus creating a credit crunch and deflation.

Do any of you see any difference ?

The main difference is that supposedly central bankers could know better. But why should they be wiser than all who want them to be foolish ?
Optimism leads then to pessimism in a classic buddhist scheme.

What is the cause of deflation ?

Posted by: Dubreuil at May 28, 2004 06:39 PM

GATA's running a story this morning from NY Post about comments made by Robert McTeer, Federal Reserve Bank of Dallas. Mr McTeer, while explaining how the Fed contains recession, "We won't make the tremendous errors in judgement that turned some recessions into depressions." His comments demonstrate the Fed bias to inflate to solve economic problems. They will do everything in their power to ease credit & make liquidity available. He even admits to an illegal action taken by the Fed after 9-11 to increase the appearance of money in the banks.

The Fed is creative & powerful. It, in concert with US govt, consider depression the real enemy, not hyperinflation. If they sniff recession, they will stimulate, which is to initiate inflationary measures. They will continue to do this untill they can't do it anymore. And when that time comes, then we probably get the depression.

When Berneke joked about dropping money from airplanes, he probably was telling us that we ain't seen nothing yet. If the hint of recession doesn't go away, they have gimmicks to try that we've never even thought of. They will, and can, create hyperinflation before they will allow depression. We haven't had the hyperinflation yet.

Posted by: Brooker at May 28, 2004 09:47 PM

I was hoping someone would say Japan.

Again, not the right answer. Japan is the largest creditor nation in the world. After the Japanese asset bubble popped, the Japanese Yen appreciated significantly against most currencies. The dollar on the other hand has depreciated significantly since 2000. The US needs to finance a significant trade deficit, Japan doesn't. The path of least resistance for the dollar is to depreciate. For the Yen to appreciate.

So I am still waiting for an example of a debt laden fiat currency that suffered from deflation.

PS. Nineu do not confuse inflation with consumption. Infation is a monetary matter. All it means is that the purchasing power of your currency is going down.

PS2. Brooker I posted the full McTeer quote on this very forum on May 24th. Scooped Crudele I guess, LOL!

Posted by: Toomie at May 29, 2004 11:25 AM

Dubreil

The big difference is that the central bank cannot create endless gold, they can create endless bank notes.

As Greenspan said in a speech in 1997:

"Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank."

Posted by: Toomie at May 29, 2004 11:51 AM

Seems to me that the US directly or indirectly has controlled the German and Japanese economies since post WW II, maybe even earlier.

How else can you explain the rebuilding of the two fascist totalitarian nations who lost the war?

There is only one global financial network where funds travel electronically, either you are aligned with that power or you don't participate.

The context of the debates most people have start with the wrong frame of reference in my opinion. We tend to believe that soveriegn nations espouse foriegn policy and economic objectives that are purely self-serving, when in reality many nations march to the beat of a collectivist, internationalist drum which their populations do not support.

You need to apply far more Machiavellian mindset to most discussion of geo-political substance.

Cheers Rich

Posted by: Rich at May 30, 2004 03:11 PM

M1 (free) money supply is very much lower than M3 (debt). If central banks wanted to endlessly increase money supply, that only could be M1 money supply for getting inflation to prevail.

Suppose somebody is heavily indebted and can´t service his debts. To alleviate his suffering, the central bank creates some new notes and gives this new money directly to this person and others in this situation. But instead of expending this new notes thus helping the money velocity to increase, buys a bigger house by making -with the help of his new money- his debt level bigger. ¿Did the new money so created do anything to lessen deflationary forces?. Not at all, to the contrary.

Suppose a lot of new notes are deposited in banks vaults, the central bank expects people will rush to take this extra cheap money for expending it, but this doesn´t happen, ¿will inflation get the upper hand if more and more money is created but is not lent?. Not at all. The more you are near a 0 % interest rate threshold, the nearer you are from deflation. Cheaper money is not inflationary if debt is not reduced.

Posted by: Nineu at May 31, 2004 06:44 AM

I talked to the lawyer who is lining up lawsuits against the Depository Trust (owned by the big brokerages and the US Fed.) and this is a trillion problem that they are trying to push past the election.

http://www.investigatethesec.com/MediaLinks.html

Posted by: steve at June 1, 2004 02:30 AM

"In comments to the U.S. Securities and Exchange Commission, C. Austin Burrell, who is providing litigation support and research for the law firms, said that StockGate is more massive than anyone may have imagined. “Illegal Naked Short Selling has stripped hundreds of billions, if not TRILLIONS, of dollars from American investors,” and have resulted in over 7,000 public companies having been “shorted out of existence over the past six years.” Burrell said some experts believe as much as $1 trillion to $3 trillion has been lost to this practice."

Posted by: steve at June 1, 2004 03:03 AM

http://www.safehaven.com/article-1597.htm

the Federal Reserve has confirmed our Stock Market Crash forecast by raising the Money Supply (M-3) by crisis proportions, up another 46.8 billion this past week. What awful calamity do they see? Something is up. This is unprecedented, unheard-of pre-catastrophe M-3 expansion. M-3 is up an amount that we've never seen before without a crisis - $155 billion over the past 4 weeks, a $2.0 trillion annualized pace, a 22.2 percent annualized rate of growth!!! There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation's fragile financial system. The amazing thing is, the Fed's actions mean they know what is about to happen. They are aware of a terrible, horrific imminent event. What could it be?

Posted by: steve at June 1, 2004 01:32 PM

If you fear terrorist attack ... Be reassured they will remain, from a statistical point of view small details... (Though they will of course hurt peoples hearts and minds).

No the main problem has been discussed over and over here ...
Interest rates are low. Lending is easy.
So people borrow.
What for ?
To buy assets. So they buy like crazy. Up goes the bubles.
Comes a problem : bubbles are very inflated.
People move out of assets, and into cash.
People save in cash related items. M3.

imho the upward trend of M3 is outside of the fed control.
Nothing can stop the cash mania, because it is the reverse story of the asset mania.

Now that people expect raising interest rates, they move out of assets and into cash, everybody get this, hey what about moving into real cash and may be make some bucks with my savings ...
Problem is, if everybody moves out of assets their value will fall.

get ready.

The other side of the story is probably growing consumer and federal debt levels.

Posted by: DF at June 1, 2004 06:07 PM

2000 - up $568 billion, up 8.6%.
2001 - up $900 billion, up 12.6%.
2002 - up $521 billion, up 6.5%.
2003 - up $272 billion, up 3.2%.
1st 5 months of 2004 - up $400 billion.


Look at it closely.
When the dow jones falls, M3 goes up.
Part of it may be the fed creating more money.
Part of it may be the investors wanting more money, if you sell, you have to sell for something, cash for instance.
So it should come as no surprise that there is more "cash" now.

Back to the question of when ... When will the fall happen. everybody knows stocks are overpriced. Everybody starts to realise housing is overpriced. Everybody knows consumers are overindebted.
When will people act on those knowledge in massive terms ?

Posted by: François Dubreuil at June 1, 2004 06:46 PM

By the way, toomie,
once more. You have to distinguish between the buying power of your currency for goods made labeled in that currency and buying power for goods made abroad.

You can have high inflation within the country and increasing buying power of your currency abroad : if everybody else gets inflation too and or if the exchange rate move in your favor (this could be because market mechanisms are biased because your money is the money used in international trade)

Japan is currently still in deflation, wether they are creditor or not towards the rest of the world is another matter.

The good thing is it's just like with the WMD ... We'll soon get to know if deflation will prevail or not.
Into recovery or double dip recession.

Posted by: DF at June 2, 2004 01:20 AM

Was just thinking, we have been linking all along the thread growth of M3 to the growth of debt, through money creation by the banks ...

Is this the only thing ?

I just mentionned that M3 moves also in respect with saving decisions by savers.


There's been some talk about borrowing short term, lending long term in here.

Could anyone trace if there is a growing discrepancy between : saving short term and borrowing long term.
(People save more and more in cash related items, less and less in long term bonds or stocks ... Because as they see interest rates rising, they fear a fall in the level of price of assets).

Saving short term, means lower velocity for money agregates. It can foster money creation, as the central bank releases more money to keep the economy liquid.

Can you help me nineu on this ?

Posted by: DF at June 2, 2004 05:16 PM

Saving short term, but "borrowing" long term. I don´t see a stable trend in this behaviour, short term savings go in part towards long term savings ,when some buying is made in well priced assets, although not so if these assets are heavily inflated and ready to deflate.

Saving short term means settling some debt, this also is a way of long term saving . Saving short, hoarding cash, is a deflationary trend that reinforces itself when debt have more burden when time goes on. When this burden is felt, there is a sort of instinctive reaction in trying to get out of this burden.

When you say that saving short term makes the economy less liquid, I don´t agree, the liquidity is growing, only the velocity decreases, and this trend can´t be stopped by the Fed when the new extra liquidity injected is not demanded to the lenders.

¿What causes the velocity to decrease?. Debt burden. ¿Can a cheaper money alleviate debt burden?. No, when interest rates are at record low levels. ¿Is the "accomodative" policy good to pay off debts?. Not at all, only perpetuate addiction to easy money and to making a difficult debt situation a ever lasting matter. ¿Is more liquidity needed in this situation?. Extra money that does not go to settling or paying off debt is of very little use.

Posted by: Nineu at June 3, 2004 07:32 AM

'K
1
I would think liquidity is MV money multiplied by the velocity. If your velocity goes down, you try to keep the economy liquid by adding more money.

True if this leads to more debt it may reduce a bit more velocity... Thus the game can only be lost.

2 I do not consider asset buying as saving. This is investing for me. Buying a house is an investment decision.
Though it may not seem so, I would say buying a share is an investment decision, but you could say it's saving.

When I say saving short term, borrowing long term, I do not imply the same ones do it.

Let's say 40% of americans hold shares.
25% of of them (10% of the total) sell them to get into cash like savings (M3) and may be repay credit cards too ...
There you get the down of DJIA and growth of M3.
And then what happens to companies...
Instead of releasing new shares, they borrow long term to the banks. And the banks can do that easily because they have more deposits...

I'm just saying. That growth of M3 is a result of a more intermediated economy.
It is logical to find that M3 grows in times of more or less falling stocks...


And if I rephrase :
Can you tell me what are the means by which the central bank could trigger the growth of M3 ?

It looks like this is out of its control.


Posted by: DF at June 3, 2004 05:35 PM

Maybe I am mistaken, but I don´t agree with you in these three matters:

1-You can consider liquidity equivalent to the "free money supply" or M1. And you can consider all the money aggregate, mostly debt, like M3. M3 is a proxy of debt in current circunstances.

2-If more liquidity is injected to the system but this money is not conducted to increase the debt, is not lent by the banks, is like if never were created. If this extra liquidity adds to debts (M3) in current situation, money velocity doesn´t increase. So is a not winning situation for the Fed. The Fed needs a increasing money velocity and plenty of liquidity that is conducted to a productive economy, not to inflating assets. I don´t see how you can "create more liquidity" when velocity decreases in a heavily indebted economy. "Adding more money" (liquidity or M1 increases) is a task that can not be performed if debt level is increased. When debt (M3) is increasing heavily, inflation is directed to asset bubbles but this trend is deflationary. When you ask how M3 can be increased by the banks, I think the answer is by making debt more affordable. When the stock markets decline, more money is put in real estate bubble and this way the level of debt (M3) goes up. This is my interpretation of the correlation between these two figures .

3-Finally, saving in my opinion is equivalent to putting aside a part of one´s income for using it in the future, you can invest this money or not, but doing so you try to make the best with the results of your saving efforts until the time you will need this money. You need to fight against the erosion of inflation to preserve your money´s buying power. So I don´t see any conceptual error making the assumption that when you save, what is saved is also invested.

Posted by: Nineu at June 3, 2004 06:40 PM

Minnesota Real Estate - Political Connections...

http://www.startribune.com/stories/1557/4802068.html

Posted by: J at June 5, 2004 12:25 AM

'K

I think there are some misunderstandings between us Nineu. And then may be also some economic (and accounting ) definitions to respell.

1 M3 in accounting is not debt. It is liquid savings.
M1 is cash and current accounts
M2 same plus very liquid savings, your saving account say.
M3 is is M2+ liquid savings, ... Hard to say it in english. short term monetary obligations ...

Of course there is a conterpart to these savings. And this debt by some other agents.

When people manage their assets they can sell assets not liquid (like stock) for more liquid assets. A move like this moves up M3, and has no influence by itself on debt level.

Yet, you can say that if many investors sell stocks to put the cash into short term saving plans ... What will the companies do ? Finding no money on the stock market, they will move to the banks, who will have lots of cash in their saving plans, and will be looking for opportunity to sell.

2 Investment is buying something that will last long. It is using your cash for sth.
When a household saves into a bank, the bank loans the money to a company or household. Saving is purely in order to have more cash later.
When a household buys a house, it uses the house, so it is investing, not saving. It does not really care if the house prices moves up or down. It needs shelter.
3 When a household buys a stock, it saves, in order to get more cash.
But it allows a company to invest.
If the same household manages the company, it would look like investing.
In accounting it is a saving decision.


So back to the discussion.
If velocity goes down, because agents prefer to invest into liquid saving plans instead of buying stock, the central bank can create more money in order to provide liquidity.
But I agree with you nineu, it will not work.
Because that money will be immediatly stored, and not spent. This is called in keynesian terms a trap of liquidity.

And back to my point :
THe growth of M3 could be a sign that asset holders are moving into liquid saving plans.

The difference is important, because saving is the part of revenue unspent, and investment is spending (buying robots, buildings, computers ...).

When it

Posted by: DF at June 5, 2004 01:44 AM

DF,
The way the central banks can trigger the growth of M3 is to raise the interest rates to a point where saving money looks better than stocks or bonds. A case could be where the interest rates are rising quickly. Other than that, if people think that cash is a better investment than stocks or bonds.

M3 is M1+M2+ large deposits ($100,000).

Posted by: Roy at June 5, 2004 09:52 AM

OK DF, I am not going to argue with you about conceptual differences in the issue of investment vs saving. I only wanted to say that saving is made in money, and money is something that must be protected against inflationary confiscation, something that almost always should be used to buy more stable assets (buying gold, bonds or shares for instance, these being or not an investment).

In the issue of M3 been liquidity, consisted of liquid assets, I disagree with this ample view of liquidity. You can consider stock in many cases a very liquid asset, very easily convertible to cash, the same thing happens with bonds. But these assets are not part of liquidity that the Fed can create. These assets are part of debt, only M1 increases are free of liabilities and inflationary at the very beginning .

When you say that selling stocks adds naturally to M3 (you say liquidity) I disagree. When somebody sells stocks going into liquidity, another person buys losing liquidity, and the difference of previous capital and final capital disappears when markets decline, this is money that is lost. But this trend of declining liquidity is compensated by the overall market that flees simultaneously seeking other bull markets (bubbles) inflating other assets like real estate and "creating wealth". This "wealth creation" is only debt creation, so M3 goes up. And real state is a very illiquid asset, so liquidity is not added, only M3 is increased heavily thanks to the real state bubble. You can see the heavy correlation between debt levels and M3, you must not be mistaken but what it seems to be or by its definition, look instead to what M3 really represents (debt mostly, M1 is only a minor proportion and M1 it´s not growing so fastly).

If the Fed buys treasuries to the banks, monetizing debt and pegging long term rates, then the Fed is injecting liquidity to the economy. Banks have more cash to lend, they have received more money than what they paid for this treasuries. The question is ¿what can the Fed do if this liquidity goes mostly to inflate real estate bubble, but not M1 nor velocity of money get substantially increased?. The Fed only makes the debt bubble to inflate but nothing positive is added to the economy that makes it work better, "create liquidity" is not so easy when servicing debt drains more liquidity than can be injected, when debt levels make the runaway debt creation not feasible even when money is lent at zero cost.

The economy may be now flooded by liquidity, but if this liquidity doesn´t run fastly from hand to hand making the economy stronger and helping it to grow, is only liquidity that serves to especulation, dries up in bank vaults, and makes the final deflationary reckoning more perverse.

Posted by: Nineu at June 5, 2004 10:34 AM

I generally don't like talking about money velocity because I believe it obscures more than it informs.

But it seems to be a favorite of those forecasting a deflationary outcome. So here is my take.

Money velocity is the plug number in the intuitively pleasing equation of exchange:

MV = PT

Where M is money, V is velocity or turnover of money, P is the price level and T is real output.

Most people would have no problem agreeing with the conclusions of this equation. Increasing the supply of money makes its value diminish and tends to produce rising prices.

You cannot see or measure velcity directly. It reflects peoples willingness to hold or hoard cash and seems to be very sensitive to the level of interest rates in an economy.

The deflationists argue that as assets bubbles burst the velocity of money will collapse, ipso facto, the price level will go down. They believe that V will trump M no matter what the Fed does. That's what happened during the Gold standard days. And doggonit that's what they expect to see happen now.

But as Mises has pointed in many of his writings with fiat money there is always a critical point of breakdown. As the supply of money is increased directly or indirectly by the Fed or its cronies (Note that M3 includes M1), there always comes a time where velocity will stop going down because people will stop trusting the money.

Facts are stubborn things. And the fact is that there is no empirical evidence of debt laden fiat currencies suffering from deflation. In fact when it comes to paper money and debt history is replete with examples of hyperinflation. And the most startling aspect of those hyperinflations is that the price rises far exceeded the increases in money supply.

Posted by: toomie at June 5, 2004 05:05 PM

Toomie,

Damn fine assessment... simple, to the point and based on historical FACTS. The deflation campers do not realize that they are indirectly helping the FED with this the greatest mother of all schemes.......even Ponzi would be proud. :o(

Regards,


Ken :o)

Posted by: ken at June 7, 2004 02:27 AM

Debt level MUST be reduced, no doubt, in order to inflation get the upper hand.

There are two ways for debt level to be reduced: by a stronger growth than the increasing of debt or by contracting aggregate debt level. Debt level contraction should be monitored in a dwindling M3 figure.

NEVER in history debt level had current proportion. Toomie, you need to explain how the hell the Fed can inflate his way out of this level of debt, there is no historical background to use like a inflationary solution to a similar situation. Servicing debt is a vast effort, money supply is required to expand in greater proportion than debt does in order to maintain economy from collapsing, if M3 continues expanding instead of M1, the solution only can come with deflation.

So is not eerie to see the Fed making efforts to slowly deflate debt levels by announcing future rate increases.

Never in history carry trades were so powerful. If inflationary threats were a real danger not so many speculator would have been in the same boat. Now these speculators must be convinced that rates will be raised. Slowly, of course. I deem not possible the rates to be raised substantially in the current debt environment.

The trick of the Fed will be: "inflate or die", but trying to not to expand excessively M3. So very little of rate increases, but steadily hinting future rate increases in order to get debt levels not to continue exponentially increasing.

When new printed money goes to feed debt bubble, the only solution to stop this trend is deflation, AFTER debt bubble deflates come the inflationary bad consecuences and the collapse of the over-inflated currencies.

Posted by: Nineu at June 7, 2004 05:16 AM
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