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Massive Deflation (Not Hyperinflation)?

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Max Keiser interviews Bob Prechter the founder of ElliottWave.com at http://www.maxkeiser.com/2013/08/kr482-keiser-report-open-sewer-of-fraud/

Listen from 13 minutes in onwards

Debt destruction means huge deflationary trends under the surface, which QE is trying to combat. So we are not heading for hyperinflation.

The debt is so great, it's unpayable - and this means we are heading for deflation.

The man doesn't explain very well why prices for ordinary items people buy in the shops are rising amid the underlying deflationary dynamic.

They dropped money from helicopters in 2008, but since then they have started doing the opposite, eg with the Cyprus bail-in. No helicopter money for Cyprus.

To fight disinflation, we are encouraging misallocation of capital with low interest rates.

The speakers on the video think that bail-ins and wealth confiscation are on the menu in the UK.

Keeping the zombies liquid is causing bad debt to expand and making the deflationary threat worse.

Rising interest rates do not indicate hyperinflation is coming, but rather rising bond market rates reflect weakness of economy in countries in trouble. Demanding higher rates due to worries over the debt principals.

Rising rates will take money out of stocks and commodities and property.

I downloaded the PDF (which required registering) at ElliottWave.com and I see they are saying interest rates will rise - not because of inflation - but rather because of this fear of deflation. In 1931 bond yields rose sharply - after falling in the first phase of the Great Depression - due to fears of default on debt. The rise in yields did not presage recovery, but a relapse into slump.

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In Britain the printing has been strong enough that the country is still in inflation. But look at America as an example. Clearly there has been deflation over these last 5 years. By far peoples biggest cost is housing, and not only has the price of houses fell substantially, but the interest rates have meant a 50% fall in payments.

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interest rates will rise - not because of inflation - but rather because of this fear of deflation. In 1931 bond yields rose sharply - after falling in the first phase of the Great Depression - due to fears of default on debt. The rise in yields did not presage recovery, but a relapse into slump.

This sounds like what happened to Greece and Cyprus, except because they do not have have their own currency their bond yields rose as they tried to issue debt rather then their currency being devalued and having to raise interest rates (like the UK will have to)

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I downloaded the PDF (which required registering) at ElliottWave.com and I see they are saying interest rates will rise - not because of inflation - but rather because of this fear of deflation. In 1931 bond yields rose sharply - after falling in the first phase of the Great Depression - due to fears of default on debt. The rise in yields did not presage recovery, but a relapse into slump.

Wouldn't that actually create the defaults and thus cause deflation?

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This sounds like what happened to Greece and Cyprus, except because they do not have have their own currency their bond yields rose as they tried to issue debt rather then their currency being devalued and having to raise interest rates (like the UK will have to)

If the UK raised IR's at the next MPC meeting what do you think would happen to Sterling? How do you equate currency devaluation with raising IR's?

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Inflation is good for debtors

Deflation is good for savers

The Government is a debtor

The Government can choose either outcome

Draw your own conclusions.

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If the UK raised IR's at the next MPC meeting what do you think would happen to Sterling? How do you equate currency devaluation with raising IR's?

A run on the pound comes first.

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In Britain the printing has been strong enough that the country is still in inflation. But look at America as an example. Clearly there has been deflation over these last 5 years. By far peoples biggest cost is housing, and not only has the price of houses fell substantially, but the interest rates have meant a 50% fall in payments.

And what is this great Conservative governments response? To encourage the massive take up of debt to buy overpriced houses and indeed for the State to underwrite a portion of this debt just as any sane person should be deleveraging like mad.

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In Britain the printing has been strong enough that the country is still in inflation. But look at America as an example. Clearly there has been deflation over these last 5 years. By far peoples biggest cost is housing, and not only has the price of houses fell substantially, but the interest rates have meant a 50% fall in payments.

We live in deflationary times and the government and BoE have been, and continue to, fight it.

The result is biflation, where everyday items, food, fuel etc, normally bought with cash, are increasing in price and more expensive items, houses, cars, electrical goods, often bought with borrowed money, are decreasing.

For my spending mix, the net result is slight overall deflation.

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>Debt destruction means huge deflationary trends under the surface, which QE is trying to combat. So we are not heading for hyperinflation. The debt is so great, it's unpayable - and this means we are heading for deflation.

I used to think that. In the absence of limitless printing, it would still be correct.

However, the politicians have discovered the joy of QE, printing to run endless deficits, keeping interest rates artificially low, all without immediate consequences.

So I think it is most probable that we will follow the "inflation to crisis" path.

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We live in deflationary times and the government and BoE have been, and continue to, fight it.

The result is biflation, where everyday items, food, fuel etc, normally bought with cash, are increasing in price and more expensive items, houses, cars, electrical goods, often bought with borrowed money, are decreasing.

For my spending mix, the net result is slight overall deflation.

Alternatively, you change the mix of what has gone up. Certainly not buying as many apples, actually picked up some windfalls this morning to boot. CPI is absolutely crap at adjusting to behavioural changes. CPI may be up 25% since the crash, but my drawing aren't up anything like.

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Inflation is good for debtors

Deflation is good for savers

The Government is a debtor

The Government can choose either outcome

The Japanese government is an enormous debtor with its own currency. It has been trying to turn deflation into inflation for 20 years without much success.

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The Japanese government is an enormous debtor with its own currency. It has been trying to turn deflation into inflation for 20 years without much success.

Trying to re-inflate the housing market is our back door approach to deflation. The Japanese clearly failed as their market collapsed 80% in real terms.

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>Debt destruction means huge deflationary trends under the surface, which QE is trying to combat. So we are not heading for hyperinflation. The debt is so great, it's unpayable - and this means we are heading for deflation.

I used to think that. In the absence of limitless printing, it would still be correct.

However, the politicians have discovered the joy of QE, printing to run endless deficits, keeping interest rates artificially low, all without immediate consequences.

So I think it is most probable that we will follow the "inflation to crisis" path.

At the end of the day it all boils down to confidence.......to have low steady inflation requires constant steady growth, to have debt means someone is confident enough to lend someone that debt, knowing they will get their money back, to print money means growth is weak, debt is high and confidence is low. ;)

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Where was all the deflation that we were assured was inevitable, over the last five years?

The biggest credit bubble in history burst, and yet (after a short, sharp initial crash) we have seen CPI and asset prices rise at a steady rate ever since thanks to money printing and low IRs.

The idea that TPTB are now going to cut back on this and allow deflation to take hold is ludicrous. As pointed out, inflation benefits them massively and deflation ruins them so the policies that have stoked inflation in the teeth of what should have been a massive deflation will continue and be escalated if (when) necessary.

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Where was all the deflation that we were assured was inevitable, over the last five years?

"Average U.S. car is 11.4 years old, a record high," reads an August 6 CNNMoney headline.

and the Marine Lobster glut for a start!

Mainelobsterglutbegins.jpg

http://www.elliottwa...x#axzz2bkDhDQNq

Edited by aSecureTenant

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In this world of debt, especially UK, the assets should be falling to savers at much lower prices. Houses, but all other asset and investment classes, to help balance or settle out the excessive debts on the accounts in the system.

Instead it's been an attack on savers, propping up debtors, and thus older owners who've seen the greatest gains through debtors paying higher prices for them over the decades. US/UK/China QE, + UK FLS HTB1+2 in the UK.

Many savers still renting, not being able to upsize without the huge debt the people holding over-valued assets want to push on them. Wanting asset values or their non-savings 'investment class values' protected at very high levels, and currently enjoying that reality. Media telling them debtors too important to fail.

If we don't get rising rates, maybe we will hit a limit on what people are prepared to borrow on the push of the former winners to get savers and younger people to borrow to keep asset prices supported, with inflation in food and energy biting, and more job uncertainties in trying to prevent corrections.

Debts are retired by paying them off, " restructuring" or default. In the first case, no value is lost; in the second, some value; in the third, all value. In desperately trying to raise cash to pay off loans, borrowers bring all kinds of assets to market, including stocks, bonds, commodities and real estate, causing their prices to plummet.

The process ends after the supply of credit falls to a level at which it is collateralised acceptably to the surviving creditors. Financial assets, and all other asset-classes of value, will be selectively repudiated by default, not obliterated by inflation.

Edited by Venger

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In Britain the printing has been strong enough that the country is still in inflation. But look at America as an example. Clearly there has been deflation over these last 5 years. By far peoples biggest cost is housing, and not only has the price of houses fell substantially, but the interest rates have meant a 50% fall in payments.

Do catch up! US house prices are at an all-time high again across much of the country.

http://www.bizjournals.com/denver/news/2013/07/30/metro-denver-home-prices-set-all-time.html

Denver-area home sales prices reached an all-time high level in May, finally topping previous highs attained seven years ago before the real estate bubble burst, according to the latest S&P/Case-Shiller Home Prices Index, released Tuesday.

The widely followed gauge of home resale prices in 20 U.S. cities showed Denver-area prices were up 9.7 percent in May from a year earlier, the 17th consecutive month with a year-over-year gain.

Denver’s Case-Shiller price index for May was 140.98, meaning that local home resale prices averaged 40.98 percent higher than they were in the benchmark month of January 2000.

The previous peak index reading for Denver was 140.28 in August 2006.

Both Denver and Dallas reached new all-time-high price levels in May, the first cities to do so since the collapse of the housing market leading up to the Great Recession, Case-Shiller data show. Denver so far has seen year-over-year price gains of 9 percent or more every month through May, according to the monthly real estate report series. (See the table at the end of this article for price trends back to 2010.)

Nationwide, home prices rose 12.2 percent in May from the previous year in the 20 large metro areas followed by the Case-Shiller report.

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Inflation is good for debtors

Deflation is good for savers

The Government is a debtor

The Government can choose either outcome

Draw your own conclusions.

The government can`t stop my rent from dropping 50 quid per month, as it has just done, and that is deflation?

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The Japanese government is an enormous debtor with its own currency. It has been trying to turn deflation into inflation for 20 years without much success.

They've been trying to do it in small un-noticable steps with few side effects. They've only been unsuccessful because of that. Essentially, they've been unsuccessful because they haven't been trying hard enough.

The government can`t stop my rent from dropping 50 quid per month, as it has just done, and that is deflation?

Yes they can.

Look, the reality is if a government decides to add a zero to every currency unit then prices would certainly increase and would (all else being equal) increase by 1000%. Sure, your rent might only increase by 900% which would be a real terms fall but that's still a massive nominal increase. Debts would suddenly be far less significant, savings too, it would dramatically alter the economy and there would be big winners and losers. Governments can make this decision.

The government isn't going to add a zero to every currency unit, that's too obvious and too arbitrary and they'd get the blame from the losers. What they'll try to do instead is very gradually take steps to promote inflation in the hope of achieving the same outcome but where people don't notice. That's what Japan has been trying to do, and you can see they're now getting more desperate and trying more extreme measure. They'll get more desperate and more extreme yet, but in the end they will get inflation because it's what they want, what they need, in fact it's the only way out.

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They've been trying to do it in small un-noticable steps with few side effects. They've only been unsuccessful because of that. Essentially, they've been unsuccessful because they haven't been trying hard enough.

Yes they can.

Look, the reality is if a government decides to add a zero to every currency unit then prices would certainly increase and would (all else being equal) increase by 1000%. Sure, your rent might only increase by 900% which would be a real terms fall but that's still a massive nominal increase. Debts would suddenly be far less significant, savings too, it would dramatically alter the economy and there would be big winners and losers. Governments can make this decision.

The government isn't going to add a zero to every currency unit, that's too obvious and too arbitrary and they'd get the blame from the losers. What they'll try to do instead is very gradually take steps to promote inflation in the hope of achieving the same outcome but where people don't notice. That's what Japan has been trying to do, and you can see they're now getting more desperate and trying more extreme measure. They'll get more desperate and more extreme yet, but in the end they will get inflation because it's what they want, what they need, in fact it's the only way out.

If they did that the belief in the currency would evaporate and there would just be off the books (government books) trade in everything? The fact that Japan has been trying for 20 years, and the fact that my rent was only £50 p.m less in 1997 leads me to the conclusion that you are talking nonsense. If "they" had the power to keep a consumption/housing bubble going indefinitely they would, they can`t hence all the strife we are going through now.

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If they did that the belief in the currency would evaporate and there would just be off the books (government books) trade in everything? The fact that Japan has been trying for 20 years, and the fact that my rent was only £50 p.m less in 1997 leads me to the conclusion that you are talking nonsense. If "they" had the power to keep a consumption/housing bubble going indefinitely they would, they can`t hence all the strife we are going through now.

Did you read the bit where I said they weren't going to add a zero to every unit? I was using an extreme example to make it easier for you to understand.

You're absolutely right that (in my extreme example) belief in the currency would evaporate, that people would switch to barter and unofficial currency, which is another reason why the process has to be slow and hidden as much as possible. That doesn't mean it's not happening.

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in the end they will get inflation because it's what they want

The UK government is just another player in all of this. Sure, they've got a lot of power (legislation, taxation, printing), but they have huge responsibilities too, not least to keep the lights on and ensure that there is food on the shelves and a roof over people's heads. The UK is not North Korea and there are many ways in which politicians can find their desired policies blocked by other players. Thinking along the lines of "the government will do absolutely anything to achieve X" is far too simple a model of how political power is acquired and exercised.

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Wouldn't that actually create the defaults and thus cause deflation?

Yes, it would be a self-reinforcing circle - or spiral down = but the point is that deflation and massive interest rate rises (he said 20% interest rates) are not mutually exclusive. See what happened in 1931. He argues we are one further turn of the cycle ahead of where we were in 1931 and so the spike in interest rates will be much larger.

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If the UK raised IR's at the next MPC meeting what do you think would happen to Sterling? How do you equate currency devaluation with raising IR's?

I'm not talking about raising the Bank Rate, which is a policy rate, but bond market rates (bond yields) surging - the government has no control over this.

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