Massive Deflation (Not Hyperinflation)?

[pjw]

>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.

One theory is we get deflation followed by hyperinflation, as the policy response to deflation overshoots.

[Sour Mash]

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.

The government has EVERY reason to stoke inflation and NO reason to permit deflation. Hence, absent an absolutely huge external market event such as an impending sterling collapse (unlikely as every major currency is printing) we will get inflation.

They can't control precisely what will go up in price or by how much but pump enough cheap/free money into the system and money will flow to assets purely as a way to protect value and return yield.

[R K]

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

Can never really grasp Keiser's agenda.

On the one hand he rants against the FED, money 'printing', the banks (especially the bullion banks) who he asserts manipulate DOWN, never up, the price of gold. He's a hard money afficionado etc etc.

Yet at the same time he's against bail ins and wealth confiscation from the very people who have benefitted from what he's supposedly against in the first place.

For consistency he ought to be 100% in favour of wealth confiscation, bail ins and taxes for the rich who have benefitted from higher asset prices.

Odd bloke.

[Sour Mash]

Can never really grasp Keiser's agenda.

On the one hand he rants against the FED, money 'printing', the banks (especially the bullion banks) who he asserts manipulate DOWN, never up, the price of gold. He's a hard money afficionado etc etc.

Yet at the same time he's against bail ins and wealth confiscation from the very people who have benefitted from what he's supposedly against in the first place.

For consistency he ought to be 100% in favour of wealth confiscation, bail ins and taxes for the rich who have benefitted from higher asset prices.

Odd bloke.

Wealth confiscation (through stealing credit from bank accounts), bail-ins and taxes are highly unlikely to affect those at the top. If you think that anyone 'important' is going to be forced to eat the consequences of the credit bust, you are kidding yourself. TPTB made it clear very early on the preserving the wealth of insiders was the priority.

[R K]

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.

Real house prices have been falling, so that's factually incorrect.

Savers have been made whole, despite the banks they lent their money to being insolvent. Of course in a world of surplus supply it's silly to expect real returns on savings at the present time. With zero risk and 100% guarantees that would savings rentierism which would be worse than land rentierism.

[DabHand]

Deflation is the vanguard of hyperinflation.

Too many claims/hypothecation/collateralisation of assets both now and future, not enough uncollateralised cash flow to satisfy claims as they come due = default and asset price collapse.

Monetisation to stop this by the govt = monetisation of claims turning credit in fiat (i.e swapping crap collateral with cash or near cash instruments at face value is monetisation imho). Leverage is not defaulted but inflated away. High inflation guaranteed if no default allowed for initially.

Jump to hyperinflation only possible where GDP collapses such as Zimbabwe or where printing is chosen and persisted with in a country where govt is a big state employer with mainly nationalised industries (Weimar).

I choose high inflation and then default. To quote Denninger, its mathematically impossible for us to get out of this hole without one and probably both.

[pjw]

Of course the government CAN create inflation. The fact they haven't been determined enough in Japan - for fear of consequences - doesn't mean that if they hired Robert Mugabe they couldn't do it.

In the UK: all you do is stop collecting any taxes and carry on government spending of £800bn a year - all conjured up by QE. Prices would skyrocket - but so would bond yields...

[zugzwang]

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.

Creating a 'goldilocks' level of demand is far from straightforward, especially in a globalised world. The Japanese still haven't succeeded. On the other hand, as soon as the sovereign decides to hyperinflate it surrenders control of its economy to speculators. Govts have generally chosen to default instead, or have at least partially defaulted first before hyperinflating.

[evetsm]

Monetary inflation is devaluing of the currency, more currency is required to buy goods than previous. Debt and asset deflation is not the same as monetary deflation. Defaulting on debt removes a huge demand for currency required to service the interest payments on debt. The amount of currency does not diminish and by the iron cast laws of supply and demand, the value of the currency falls. ie the currency inflates.

Prechter confuses debt and asset deflation with monetary deflation. I think he is wrong. With the vast amount of debt that cannot be repaid, we will experience monetary hyperinflation as demand for currency collapses.

[dances with sheeple]

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.

Are you sure about that?

[dances with sheeple]

The government has EVERY reason to stoke inflation and NO reason to permit deflation. Hence, absent an absolutely huge external market event such as an impending sterling collapse (unlikely as every major currency is printing) we will get inflation.

They can't control precisely what will go up in price or by how much but pump enough cheap/free money into the system and money will flow to assets purely as a way to protect value and return yield.

Well they managed it quite well during the period of 2001 - 2007? But now that housing is a busted flush I don`t see any comparable mechanism that gets liquidity into the hands of the sheeple with the same blind belief that they are actually creating wealth from their "investment". QE money is making the sheeple spend less, not more? Wage rises or citizens income cheques would cause some extra spending maybe, but banker man can`t take his cut from them so easily, so probably not going to happen.

[pjw]

Monetary inflation is devaluing of the currency, more currency is required to buy goods than previous. Debt and asset deflation is not the same as monetary deflation. Defaulting on debt removes a huge demand for currency required to service the interest payments on debt. The amount of currency does not diminish and by the iron cast laws of supply and demand, the value of the currency falls. ie the currency inflates.

Prechter confuses debt and asset deflation with monetary deflation. I think he is wrong. With the vast amount of debt that cannot be repaid, we will experience monetary hyperinflation as demand for currency collapses.

No - you are wrong. Because you don't understand that credit is the major part of "money".

[Dorkins]

I like this idea that governments can always achieve whatever they want because unlike every other economic actor they are not restrained by access to limited resources. Does make you wonder why history is full of governments losing elections, losing wars, defaulting on debts, being thrown out of monetary unions etc. Most of these things have happened to the UK government during the lifetime of HPC posters. Still, maybe that's what they had planned all along.

[evetsm]

No - you are wrong. Because you don't understand that credit is the major part of "money".

No, credit is a CLAIM on money. When a loan is made the money is simultaneously created and deposited in the borrowers account. When the loan defaults and that claim ( demand) for the money disappears, the money is still out there with diminished value.

[evetsm]

No - you are wrong. Because you don't understand that credit is the major part of "money".

No, credit is a CLAIM on money. When a loan is made the money is simultaneously created and deposited in the borrowers account. When the loan defaults and that claim ( demand) for the money disappears, the money is still out there with diminished claim/demand, hence diminished value.

Edited August 12, 2013 by evetsm

[FreeTrader]

The inflation/deflation debate is a fascinating one and the opposing views posted here often appear equally persuasive on both sides. However I'm extremely suspicious of anyone who claims to know with certainty what the future will hold, and that certainly applies to Bob Prechter.

I remember Prechter making much the same call in the 1980s, 1990s, and 2000s, so at least I'll grant him consistency with his outlook. He did say that equities would rise in the 1980s, but the bull market would presage a massive deflationary bust. In the early 1990s he reckoned the DJIA would hit 3600 and then crash to a low between 100 and 400, with real estate and other assets collapsing to a fraction of their former levels.

In the early 2000s he was once again claiming imminent deflationary depression, with the Fed powerless to stop it because policymakers would hit the zero bound on interest rates. Money printing wouldn't be an option because it would cause a bond market collapse, with yields spiking as investors dumped their holdings en masse.

I could go on, but I still stick to the same viewpoint that I held when I first joined this site: that I have no real clue what is going to happen as a result of the problems that we face, and therefore the best course of action is to position myself so that whatever the outcome I will hopefully be insulated from the worst of it. That doesn't mean to say that I don't mentally assign different probabilities to future events based on changes in politics and monetary/fiscal policy, and I'm only human so I have to constantly battle against becoming trapped by confirmation bias.

Prechter may well be right – eventually – but HOW we get there and WHEN we get there are key aspects to this that I don't think he's got any more insight to than you or I. He's been selling subscriptions to investors for thirty years or more and I dread to think what the financial situation would be of any individual who signed up and diligently followed his forecasts throughout that time.

[dances with sheeple]

No, credit is a CLAIM on money. When a loan is made the money is simultaneously created and deposited in the borrowers account. When the loan defaults and that claim ( demand) for the money disappears, the money is still out there with diminished claim/demand, hence diminished value.

Why? If I borrow 10k, spend it and default on the loan, the money is circulating with the same value for others that use it as when I used it, only difference is the bank have a claim on me for 10k?

[winkie]

They don't print money in Europe, thus allowing their house price assets to fall.......now they have more room for real growth?

[goldbug9999]

The inflation/deflation debate is a fascinating one and the opposing views posted here often appear equally persuasive on both sides.

Both views have technical merit, the problem is that the outcome hinges on policy decisions by a handful of individuals.

[Dorkins]

Both views have technical merit, the problem is that the outcome hinges on policy decisions by a handful of individuals.

I'm not sure this is true. The people at the top might look like they get to choose option A or option B, but in the long run I think their actions are going to be forced by political and economic events outside of their control.

[evetsm]

[/b]

Why? If I borrow 10k, spend it and default on the loan, the money is circulating with the same value for others that use it as when I used it, only difference is the bank have a claim on me for 10k?

If you decrease the demand for anything, all else equal, the price/value falls. If you decrease the demand for money, all else equal, then you devalue the money.

Debt servicing at these levels are the major demand for money. Take that demand away by defaulting on the debt, the value of money falls. All else equal.

The debt deflates, the money inflates.

[evetsm]

[/b]

Why? If I borrow 10k, spend it and default on the loan, the money is circulating with the same value for others that use it as when I used it, only difference is the bank have a claim on me for 10k?

If you decrease the demand for anything, all else equal, the price/value falls. If you decrease the demand for money, all else equal, then you devalue the money.

Debt servicing at these levels are the major demand for money. Take that demand away by defaulting on the debt, the value of money falls. All else equal.

The debt deflates, the money inflates.

[Butthead]

I'm not sure this is true. The people at the top might look like they get to choose option A or option B, but in the long run I think their actions are going to be forced by political and economic events outside of their control.

You're wrong. Only slightly wrong, but wrong none-the-less.

The people at the top do get to choose option A or option B. Their actions are and will be influenced by political and economic events outside their control and these events may make option A or option B relatively more compelling than the other, but it's still a choice.

Think about it. We're talking about a printing press. It won't just jump into life itself, someone will choose to fire it up or not.

Edit: Formatting

Edited August 12, 2013 by Voice of Reason

[The Spaniard]

Why? If I borrow 10k, spend it and default on the loan, the money is circulating with the same value for others that use it as when I used it, only difference is the bank have a claim on me for 10k?

The loss to a bank of a debt asset is reflected in its balance sheet by an equal loss of shareholders' capital on the liability side, all else equal.

Sooner or later this impacts the spending power of the bank - dividends, salaries, bonuses etc.

In general such bank spending re-jigs the banks' liabilities and moves money from the shareholders' capital into the accounts of non-banks.

Up to bank insolvency, or state intervention, this is how the broad money supply is diminished by the default of bank debt.

[pjw]

No, credit is a CLAIM on money. When a loan is made the money is simultaneously created and deposited in the borrowers account. When the loan defaults and that claim ( demand) for the money disappears, the money is still out there with diminished value.

You seem confused. Money is just ones and zeros on a screen. A tiny proportion of money is notes and coins. The PDF cited in the first post shows that base money - the creation of which has zoomed up in recent years - is still utterly dwarfed by the scale of loans created, and the financial derivatives that are sold on the back of that - adding up to more than a quadrillion dollars in total, which compared to 3 trillion in base money is really a huge sum.

Loans default because people can't pay them back. The money has been malinvested or wasted. None of your post had any meaning whatsoever. Money can only "still be out there with diminished value" if inflation is eroding the value of money.