Tuesday, Dec 16, 2008
How can the end result of all of this "quantative easing" be anything other than hyperinflation?
CNBC: Fed May Signal Other Steps Besides Interest-Rate Cut
The Federal Reserve is expected to cut interest rates to close to zero on Tuesday and may point to further unconventional steps to battle a year-old recession.
Economists expect the US central bank to lower its target for benchmark overnight rates by at least a half-percentage point to 0.5 percent and clearly state it will deploy so-called quantitative easing measures to restore growth.
The Fed on Monday said US industrial production fell 0.6 percent in November, with manufacturing output shrinking 1.4 percent to put it 7.3 percent below its year-ago level. A separate index of manufacturing activity in New York state hit a record low in December.
Posted by flintster1994 @ 07:25 AM (994 views) Add Comment
26 Comments
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1. Wappers said...
There has been a large amount of commercial money destroyed by deleveraging, by creating more central bank money some of the commercial money will be replaced in the economy, this will lessen the shock of large amounts of commercial money disappearing over such a short period.
2. mountain goat said...
Flinster - I too have been expecting inflation but it is still not a certainty. The problem is the amount of debt that has been baked into the price of everything. House prices is the obvious case. There is no way the world economy could support the price of house prices. It was based on debt, so phony prices and value. The same is try for commodities, the commodity futures markets were probably more highly leveraged than housing. So now we have de-leveraging, taking the debt price out of value of things, deflation. Central banks are trying their hardest to inflate this deflating spiral. It is only if they over-react that we get inflation, otherwise we get a deflationary collapse and money (and I include gold and silver as money) will appreciate further in value.
Related to this we shouldn't be disheartened by savings being undermined by quantitative easing just yet. Think about it, our savings can still buy more of a house today than they could 3 months ago before the sterling collapse. So even at 0% IR savers are better off as deflation collapses the prices of highly leveraged items.
3. drewster said...
flintster,
Fractional reserve banking is the answer to your question. Right now a lot of money is being destroyed by the unwinding of debt; to create more money the Fed can either cut interest rates (thereby encouraging borrowing) or they can just print money. They've tried the former, with little success - now they're trying the latter. I'm no fan of the Fed, but it is probably the least bad option.
4. flintster1994 said...
Thanks for your input guys. I'm no expert by a mile but the sums of money being banded about now defy belief. People are now getting used to the term "Trillions of Dollars." I just get a feeling that they are throwing dynamite onto a bonfire!
5. crunchy said...
Great, with inflation we lose savings because interest rates are set to low and with deflation savers lose money because interest rates hit the floor.
Interest rates are now way down because of this bubble. Will they ever function properly again for the prudent and independent?
6. flintster1994 said...
I wonder what the exact sum of money, down to the last penny, that would be the tipping point and change the entire economic system as we know it? A quadrillion, a quintillion? Do you think anyone knows? I'll put my self out on a limb and say, yes.
7. george monsoon said...
Its hard work being the underdog, with no financial background and very rudimentary understanding of the "buzz financial speak" yet, still having an uncanny insight into how the financial system works. About 5 months ago, I posted a prediction of hyper-inflation, and was basically shown the door with my ideas, by all the so called experts on here. I have made other solid predictions about how the financial world is unwinding, and all have been frowned upon with "no it doesn't work like that" followed by extensive, very technical explanations of how and why my ideas can't work.
You were all wrong. I was right, and although there is no clear evidence yet that hyper inflation has kicked in, its only a matter of time.
It would be nice to be acknowledged once in a while guys.
Here are some more predictions, please feel free to mock me on them, but log them for future reference, so that I can return the favour.
Lithium - spiking in the next 10 to 15 years, to astronomical proportions - the reason being that lithium is the only viable metal with which to build electric car batteries. Most of the unmined lithium is in communist or unstable countries. demand will outstrip supply and prices will be pushed up, when we all convert to electric.
(LPG, hydrogen and other fuels are dead in the water because of cost and availability)
Gold - big rise, big fall (18 months)
Oil - massive rise in oil price (second wave of speculative buying) - 2 years to peak
House prices - hit bottom in 18 months, but only because inflation has risen to meet the falling price.
8. mountain goat said...
John Mauldin and Gary Shilling recons its deflation for 2009.
9. flintster1994 said...
George,
I don't know anything about lithium, I can agree about gold and oil(don't have such a stringent timescale as yourself though) and with regards to house prices; I'm inclined to think they will fall for a lot longer than you predict. Just my tuppence worth!
10. drewster said...
Martin Hutchinson of The Bear's Lair reckons there might be some mild deflation short-term, but in twelve months' time it will be forgotten. He goes on to say: "Inflation will thus resurge, both domestically and internationally, and will quickly reach the double-digit level at which central bank action to restrain it becomes unavoidable".
On the other hand, Mish is a strong believer in the deflation case. In his latest post he writes: "Deflation is intensifying. People are going to be frightened by it."
Ironically Mish has been far more bearish than The Bear's Lair, and I have to say Mish has been right on every count so far. Strangely enough they both believe that gold will do well, although for different reasons.
11. harold said...
It is an interesting historical fact the Weimar Republic went through a period of deflation immediately prior to government-induced hyperinflation in 1923.
Message: don't believe the deflation propaganda. I even heard it on the in-house TV pumped out in my local HSBC.
12. paul said...
Deflation is a myth.
We are heading for exactly the same as the Great Depression - hyperinflation induced by the government printing money.
13. wage slave said...
Once politicians start printing money it's only a matter of time before we get hyperinflation. Remember - unlike us - politicians don't have to live with the consequences of their actions.
14. tudorian said...
@ George #6
You're not the only one that calls here without much knowledge of the financial industry or economics.
During the last 6 months, I have read the many differing predictions, both 'mainstream' and 'leftfield' published on this site. I think that its time that I shared my observations.
I do agree that oil is set to spike in price again, and like the filntster, know nothing about lithium (should I save all my spent watch and laptop batteries for recycling revenue ???) I do not believe that we'll see the kind of through the roof gains that have been predicted for gold though. " Gold ! huh What is is good for - absolutely nothing" (electronics excepted ) - sampled from Edwin Starr.
Energy, clothing and food price rises will herald the next inflationary period ........ imho
New car sales will plummet further, PC / consumer electronic sales will drop.
House prices will fall until 2012 Olympics near. I'm convinced of that. But by then, who knows what UK will look like.
15. p. doff said...
6. george monsoon said... ''Lithium - spiking in the next 10 to 15 years, to astronomical proportions - the reason being that lithium is the only viable metal with which to build electric car batteries''.
A few years ago nickel-cadmium was the best thing since sellotape, then along came lithium-ion. Who knows what will be developed over the next "15 years".
Anyway, batteries will be obsolete as we are set to have "free energy" in the next couple of years don't-ya-know. LOL
16. str 2007 said...
Well Done George
I'll save this thread to favourites.
You all seem fairly convinced on Oil (although I think an article in the last 48 hours talked of it falling to $10 a barrel).
On the subject of Oil and Lithium the new Honda Clarity uses Hydrogen to manufacture electricity 'on board'.
Could that spell then end of Oil and Lithium ?
Still seems to be a split on Gold, and I can't make my mind up either. ( I will admit my dithering on that one has currently cost me about 25%).
17. Chaca said...
'Deflation is a myth.
We are heading for exactly the same as the Great Depression - hyperinflation induced by the government printing money.'
Before you make sweeping statements like this you should do some reading. Deflation is clearly not a myth as there are many periods of sustained deflation in the history books. The most well known of these was the great depression. It was a long and damaging period of deflation and negative GDP growth. During this period monetry policy in the US was very tight, the exact opposite of printing money and the made the situation much worse than it might have been.
Also if you want to see an example of deflation together with the printing of money which did not end in hyperinflation just look at Japan over the last 15 years! The Japanese printed money like there was no tomorrow and yet inflation barley got above 0.
18. Prudentman said...
'Quant easing ' ? Seriously speaking guys, How does this differ from Zimbabwe's approach ? Perhaps the Africans need a lesson in euphemism.
"Will they ever function properly again for the prudent and independent?" - you bet crunchy !!. This downturn is akin to a runaway train with so much momentum behind it (excess leverage, lax regulation, sub prime NINJAs, madmen and madoffs etc) and will not be stopped until its run its course. All measures applied by central bankers will only aggravate this momentum as its done so far - fools the lot of them for trying to defy gravity !.
19. layers said...
@5 George:
Very brave of you to make predictions, but my take is that as far as oil goes, it's a manipulated market as is Gold, so who knows where it'll be taken. If Goldman Sachs say if will go up, probably bet half the top-end they're creating - was it back in July they said it would hit $150 and although it got to about $130, it fell off a cliff - sucker trap maybe?
As for gold, well by all rights it should be a lot higher, but has worked as a perfect hedge for me against a falling GBP / USD, and I would never advocate hoarding of gold simply to make money, as I've stated before, but it is a viable store of wealth IMO.
Agree with STR2007 that Honda's Clarity (and the Top Gear boys' views) that this is the future that will make battery cars a historically funny 'blip' - particularly given the huge cost to source and manufacture those batteries. Maybe this is why Toyota have moth-balled the new Prius plant in the US.
However, how long it will take Hydrogen to be available across say the UK, will be the major factor for how quickly these cars will be adopted – I’d buy one tomorrow if the infrastructure in London was available.
20. george monsoon said...
Ok, I missed the episode of Top Gear, with the Hydrogen generated electrical engines, but a friend has explained that this could be a viable option, however will cost as much as petrol to produce.
We will have to wait and see what happens here.
21. george monsoon said...
Just to add to my previous comment..
Hydrogen is still experimental and we are at least 10 years away from a production model whereas the elctric car is now on the road, with several alternatives and is cheaper to manufacture.
22. scandinavian pessimist said...
George,
Regarding your Lithium argument: you seem to assume that future car batteries will be based on Lithium because it is financially advantageous over other alternativs (Hydrogen, etc, etc) and a shortage of supply will then drive Lithium prices "to astronomical levels". However, if Lithium prices go through the roof, Lithium batteries are no longer attractive in comparson with other options (Hydrogen, etc, etc). Can you see it's a circular argument?
23. paul said...
Chaca,deflation is a myth this time round.
What the Japanese did was to buy foreign currency with the money they printed - in other words, they exported the inflationary effects of printing money.
That's not an option. And you should read up on what exactly happened before you make swepping but erroneous judgements!
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