Friday, Feb 20, 2009
Robert Prechter on deflation
Market Oracle: Government Intervention Will Fail to Spark Inflation and Prevent Deflation
Robert Prechter's view on why deflation is the final outcome because governments cannot force people to borrow for ever
Posted by sold 2 rent 1 @ 10:15 AM (1237 views) Add Comment
38 Comments
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1. wdbeast said...
This article is so old, it's gone hairy!!
2. sold 2 rent 1 said...
IMHO Robert Prechter is quite likely to be right but his timeframe may well be out.......again
The stock and property market will carry on falling as a result of the recession and lack of willingness to borrow by individuals
Central banks will buy the toxic debt off the banks using QE (printing of money) and they will be ready to lend money again by the summer of 2009.
So who will borrow more money to keep the debt ponzi scheme going? Hedge funds of course....to buy commodities (energy, food and metals) as there is a dash to get out of fiat money. The 29-30 commodity cycle has yet to reach its peak.
Previous commodity bull peaks
April 1920
Jan 1951 (30 years and 9 months)
Nov 1980 (29 years and 10 months)
So the commodity peak should hit in 2010 (IMHO spring 2010). Only once this commodity bubble burst will we see deflation on the scale enviages by Prechter.
IMHO we shall have a hyperinflationary depression in 2010 followed by a deflationary depression in 2011.
Gardenia's food production techniques will come in handy then.
3. james stephenson said...
I disagree with the premise. There are a lot of irresponsible people in the UK. They have the ability to take on much more credit. There are many, many people who are quite prepared to try to borrow their way out of debt.
It is quite possible that before people stop taking credit, the government will have increased the money supply by so much that we have inflation.
The principle is the same as the bank bailouts. You start with 10s of billions and you gradually need to increase it. Once you have put a certain amount in, you cannot then let the whole thing collapse (because you will have entirely wasted the billions you have so far given away), so you continue down the path, as we currently are (discovering too late that the banking liabilities are far beyond any government’s ability to pay).
The same is happening on a slightly smaller scale in the car industry.
The same will happen once the government embarks upon quantitive easing.
Inflating the credit/money supply will cause inflation.
I cannot guarantee inflation – I think that in the madness of this current climate all bets are off – all predictions useless as soon as they are made.
However, there are circumstances that could make rampant inflation a certainty. Iran, for example. If the West needs to take action against their nuclear capability then this will impact petrol prices and the knock on effects of that would likely be inflation. These types of events have triggered inflation in the past.
Deflation will be bad enough – rampant inflation will be a nightmare in the current circumstances
4. Cheekie Charlie said...
Surely the main driver for inflation is wages and their heading south.
5. james stephenson said...
...although inflation will cause a painful short-term correction and will bottom things out quicker - deflation will be the slow-cooker of decade long stagnation.
6. James Stephenson said...
sold2rent1@2
despite my saying that, at the moment, predictions are worthless as soon as they are made, I think you are absolutely spot on.
Ironically, I think that if we don't have the inflationary period to force the issue with those who are hanging in there, then the deflationary period will be much heavier.
And Prechter would be favouring deflation over inflation - that's his bag.
7. japanese uncle said...
Deflation is a great cure for the debt-orientated sick minds.
8. sold 2 rent 1 said...
"deflation will be the slow-cooker of decade long stagnation"
Once the FINAL commodity bubble bursts in spring 2010 and a deflationary depression sets in there will be no lost decade or WW3 scenario.Why not?
Because something magical will appear on the horizon to save the day. Free/Dark energy for all. Everything then changes.
Remember the global system is stable.
9. japanese uncle said...
s2r
You may wish to elaborate on 'Free/Dark energy'.
10. stillthinking said...
inflation is a rate of change, not an absolute measurement, any one-off price shock leaves the inflation measurement in one year. e.g. imports from Europe are more expensive because of the collapse in sterling, but that isn't inflationary because there is a distinction between a higher price(more expensive) and a continually rising price(inflation).
perhaps there will be some problems concerning oil supplies, as production is cut, but that makes oil more expensive and does not necessarily cause inflation. In the 1970's, the oil shock -triggered- inflation, but it was not inflation itself. So what would an oil shock do today? I am not so sure it would trigger inflation, certainly it would affect demand. if you take the view that inflation is excess demand against supply and can only exist during the mismatch, while supply catches up, then an oil shock in our current environment would be deflationary. so you could argue that any oil shock would exaggerate any existing trend.
demand is going down at the moment for many reasons, unemployment, housing transaction freeze, fear. and looking at the various articles about existing personal debt, I don't think there is any spare capacity there at all, and of couse mortgage lending is broken from both sides, risk-averse buyers and risk-averse banks.
for our government to inflate the supply of credit past the amount of losses appearing every day would be such a herculean task of printing they may as well inform everybody that Andres toilet tissue is the new £25 note.
11. sold 2 rent 1 said...
JU,
“You may wish to elaborate on 'Free/Dark energy'.”
There are numerous claims of free energy systems to have been invented that break the so-called laws of physics.
IMHO these systems probably get their energy from dark energy which is only accepted as a hypothesis for now. Once dark energy is detectable everything will change and these systems will emerge for the masses (not governments or corporations)
Read: The World of Free Energy
http://www.free-energy.ws/lindemann-1.html
12. japanese uncle said...
s2r
Thanks
I must appreciate some of these, (4) & (7) in particular, may well be the genuine cases of invention, but could devastate the positions of oil majors and other parties monopolizing the source of energy. They certainly have every reason to suppress so these inventions should not see the light of day.
13. James Stephenson said...
sillthinking@8
"...makes oil more expensive and does not necessarily cause inflation..."
With no one country being self sufficient and having to import goods and food, oil price increases will always be inflationary as items are more expensive to transport - as we saw last year.
14. james stephenson said...
stillthinking@8
"makes oil more expensive and does not necessarily cause inflation"
No one country is self sufficient, all import food and goods. Therefore, oil price increases will be inflationary as food etc. is more expensive to transport - as we saw last year.
This comment will possibly appear again - I keep forgetting to use the pass word.
15. letthemfall said...
I'm putting my faith in the fairies.
16. james stephenson said...
sold2rent1@9
I kind of agree that something is in the pipeline. We have good evidence to belief that world events like this are pre-planned.
After all, this could have been stopped at any time if the financial system had been regulated. Enough people saw this coming and those in power are certainly not stupid (however they may appear).
I personally think there will be dollar & starling collapse and the expansion of the Euro and the emergence of the Amero. I believe this is all just a power grab by the NWO types.
As for dark energy - read proper science papers - the scientific community has no clear understanding of it. Not enough to be planning to use it as a power source.
And besides, anything that violates the second law of thermodynamics has to be approached with the utmost suspicion.
There is no free lunch.
We will make the future sustainable, by being effective stewards of it's resources, not by waiting on a miracle to make it all right.
Put any of Lindemann’s stuff on a serious science forum inhabited by real scientists and see the withering response.
Your BS radar should be kicking in about the point where he gets all religious on us:
“The Source of Free Energy is INSIDE of us. It is that excitement of expressing ourselves freely. It is our Spiritually guided intuition expressing itself without distraction, intimidation or manipulation. It is our open-heartedness. Ideally, the free energy technologies underpin a just society where everyone has enough food, clothing, shelter, self-worth, and the leisure time to contemplate the higher Spiritual meanings of Life. Do we not owe it to each other, to face down our fears, and take action to create this future for our children's children? Perhaps I am not the only one waiting for me to act on a greater Truth.”
Once again, there is no free lunch. The SLTD has never been contradicted, despite many people claiming to have invented perpetual motion machines etc. I agree that if free energy was available, governments would have hidden it to preserve the status quo, and if there was ever a time to reveal it, now would be that time as dwindling oil will hand more and more power to the Middle-East. The only problem is that there is no free energy.
I think this depression is the birth pangs of the New World Order. Brown calling for a new Bretton Woods is part of it.
17. bellwether said...
James things getting more expensive is not inflationary, increasing the money supply faster than it is contracting in a way that is unsupported by GDP growth is inflationary
18. letthemfall said...
james s: "I think this depression is the birth pangs of the New World Order"
Almost as hopeful as free energy? We can hope.
19. james stephenson said...
letthemfall
We could hope - if the NWO was going to be good for anyone who isn't massively wealthy or in power. The crapiness of national democracy will be magnified with global democracy.
I am not really saying that the NWO is on our doorstep. But this whole exercise will just be a huge power and wealth grab by the elite. Socialism on a massive scale. Virtually everyone in power in the developed world has a socialist bent. Obama, Brown, the power mad freaks in the EU - all Marxoids.
sold2rent1
Looking at Lindemann's examples:
The fridge does remove 3 KJ of heat for every 1 KJ of work supplied.
But the issue is that the heat is useless. To make it of use you would need a way to get it into another system and that is where you have to pay the piper. Of course there are convection devices that can produce power, but not as much as the 1KJ that is put into the fridge to start with.
20. shipbuilder said...
The only argument i've heard against deflation is that unemployment shoots up. However the idea that high unemployment is inevitable is a nonsense pushed by those who wish to maximise their profits. The rules about 'the way things work' are being chucked out the window for the elite, why not the rest of us? Private companies could choose to sacrifice profits and keep people on, employ new people in job sharing and so on. It's about time that those who benefitted massively from the boom gave something back to save themselves in the long term - if we started thinking about things differently, about rewarding the correct behaviours. If I am a typical 'saver' then when house prices hit a reasonable level, I have the funds to buy - the savers will restart the economy. With inflation, the economy cannot be restarted without yet more debt.
21. bob1 said...
james s
An air source heat pump works (a fridge in reverse) has a COP of about 3.7. In other words for every 1 unit of power it uses, it supplies 3.7 units. A very real example of this technology, heating homes and water all over the world
22. letthemfall said...
james s
Not sure what you mean by socialism - surely not a power grab by the elite; we have that now. I don't see anything especially socialist about Obama or Brown. Our PM strikes me as rather conservative, sharing the approach of all politicians in power since 1979: let the rich get richer because somehow it benefits everyone. Hopefully that notion at least is now dead. I would like to see a fairer distribution of wealth, and economic power not concentrated as it has been.
23. goweresque said...
Surely the most likely cause of an inflationary spike, turning into an inflationary spiral, is the collapse of the currency? I'm with Prechter in that I don't think the economy can take anymore debt at the moment, so QE won't have much of an effect on economic activity. BUT if in so doing it scares the foreign capital out of the City, and the pound falls big time, that will definitely spike inflation. The question is whether an inflation spike is containable, or whether it would start to feed through into wage claims, especially in the public sector, and elsewhere in the economy. I think there is a significant chance it could get all out of hand.
24. bob1 said...
letthemfall: "surely not a power grab by the elite; we have that now"
Can you be more specific about this power grab by the elite. I don't see any power grabs
25. James said...
What on Earth is the point? s2r1, did you take a look at any of the rebuttals to your nonsensical "free/dark energy" rubbish that I put up last time you mentioned it? If not... how dare you claim you want to 'debate'. You don't, you want to preach. It's just silly!
26. 51ck-6-51x said...
I totally agree with this bit of the article:
"...the idea that a growing economy needs easy credit is a false theory. Credit should be supplied by the free market, in which case it will almost always be offered intelligently, primarily to producers, not consumers."
27. letthemfall said...
bob1:
I was quoting james s.
28. letthemfall said...
51ck
Hasn't the credit market been free these last few years? I would have said that is part of the problem.
29. 51ck-6-51x said...
letthemfall - let me reiterate the point in question - the market in trading credit has been a free one, but the supply has been centrally controlled.
30. bob1 said...
letthemfall: credit hasn't really been supplied by a free market because US agencies like Freddie and Fanny have perverted the market by effectively underwriting much of the credit issued. Obviously this led to loser lending standards than a properly free market would have provided
31. letthemfall said...
51ck
Or rather the supply has been very free - too free. The article argues what happens when credit is cheap and plentiful - which is what has actually happened - but it's not clear to me how a balanced market in credit might be achieved, given the events of the last 30 years. Part of the reason for the cheap credit over the last decade has been the money coming from the Far East, and partly central bank policy. Closer regulation? Or some means of setting interest rates other than govt or central banks? The article does reinforce the feeling that deflation is the most likely outcome now.
32. letthemfall said...
bob1
True, but this has also come about from securitisation, which is not a consequence of govt action, or at least not directly.
33. bob1 said...
letthemfall: I wouldn't disagree with you at all, but don't you think it’s ironic that the government is now banging on about legislating the market? They never stopped legislating the market. THAT is the problem.
Fannie, Freddie, savings and loan crisis intervention, currency intervention, bond market intervention, Fed signaling. These are the things that gave the green light to crazy credit. If it were a truly free market, the banks would not dare lend so recklessly and there would be only moderate securitization. I know many on this site would disagree but I believe that pure markets with zero intervention are the ideal
34. james stephenson said...
letthemfall said:
'Not sure what you mean by socialism - surely not a power grab by the elite; we have that now. I don't see anything especially socialist about Obama or Brown. Our PM strikes me as rather conservative, sharing the approach of all politicians in power since 1979: let the rich get richer because somehow it benefits everyone. Hopefully that notion at least is now dead. I would like to see a fairer distribution of wealth, and economic power not concentrated as it has been.'
I agree with you.
I suppose by socialism I mean a consolidation of power to the state. What Brown and Obama have in common is that they both believe in massive government, and the idea that government can spend you money more effctively than you can.
It is seen at the moment - instead of massive tax reduction to stimulate growth, they are embarking on massive public spending with all of it's inneficiencies. The low tax way would ease the burden on individuals - now. But they would rather spend billions of our money on... what? Teaching people to use condoms - a part of Obama's stimulus package.
They all think the State is supreme and can solve all of our issues - that's why they intrude into all areas of life. But the reality is that whatever the behemoth State tries to achieve becomes littered with waste on a massive scale. Heck - look at every IT system this government has tried to install - NHS for example.
35. letthemfall said...
bob1
I don't share your faith in free markets: I think we'd get what we have now, or even worse. I agree that govts have been pretty hopeless but tend to feel they have let markets get on with it too much, adding fuel to the fire all along. Perhaps there is such a thing as a true free market that would ensure everyone gets fair slice, but I just think we would end up more and more like a S American country.
36. James Stephenson said...
bob1
The power/wealth grab by the elite will be when housing is majority social housing again and they can sell it all back to us for a nice profit. Also using our tax pounds to shore up the already wealthy and making us all debt slaves for years to come.
Power grab - wait for Bretton Woods 2. We are also probably being prepared for entry to the Euro (Mandelson esp.) and a consolidation of the Eurozone - there will be some economic reason for them to scare everyone (including Ireland) to ratify the Lisbon Treaty. Few laws will be made in member states after that.
Likewise in the Americas there will be the Amero when the dollar collapses. This may all be an accident, but I would listen to Roosevelt when he says, 'In politics nothing happens by accident. If it happens you can bet it was planned that way'.
37. bob1 said...
letthemfall
I think we are mostly in agreement. I just think the govt "fuel to the fire" bit is underestimated. They wanted a growing tax base so they pulled up a supertanker and pumped as much petrol onto the fire as they could. A good example of a real free market is a drug dealer and junkie. The dealer supplies as much as he can without killing the addict but when the junkie is about to die, he stops supplying because he wont get paid for the last dose. It goes without saying that the British public are the credit junkies
38. shipbuilder said...
The main problem as I see it is that the system is rigged, free market or not. Zero regulation now would be disastrous because of the way corporations are constructed and allowed to operate - limited liability and 'externalities'. In addition the expectation that the government would always be ultimately 'responsible' for the economy would always reduce the risk to private business and unbalance the market.
Even with this, advertising and marketing automatically create imbalance because the consumer does not automatically have perfect information about their choices.
Basically, I don't believe that a free market is achievable - like communism it works in theory only, so I think some sort of compromise will always be best.