When Deflation turns into Inflation
Posted by slowsmile September 24, 2009
The forces acting on the dollar seem to be turning. Yin is morphing into Yang, and the monetary environment in America will soon be changing radically. It is now evident that monetary deflation is transforming into inflation as the persistent, destructive policies of the US government slowly bite and take effect. It is well known that the crossover points of deflation to inflation or vice versa are the most critical with respect to their effect on any economy; this is when the sudden appearance of deflation or inflation are at their most destructive.
In a defining article by Martin Weiss, Phd, from Weiss Research, here are his simple reasons why the US govt.’s policies must soon cause the US Dollar to inflate and devalue.
From MarketOracle.com
By Martin Weiss
Inflationary Force #1 Never-Ending, Out-of-Control U.S. Federal Deficits
As Larry Edelson explained here one week ago:
- Through August, the federal deficit hit $1.38 trillion, or three times last year’s all-time record deficit of $454.8 billion. And in September alone, the administration expects another $200 billion in red ink, bringing the total for the year to $1.58 trillion.
- The U.S. government’s official debt is now at an all-time high of $11.8 trillion, or over $100,000 for each and every household in America.
- Both the administration and its opponents agree that, over the next 10 years, the cumulative federal deficit will be another $9 trillion, driving the burden per household up to $177,000.
- The Federal Reserve is also in hock up to its eyeballs, with more than $2 trillion in liabilities on its balance sheet. That brings the total burden up to $194,000 per household.
- Perhaps worst of all, the government’s unfunded obligations for Social Security, Medicare, and Federal pension payments are also ballooning higher and now stand at an estimated $104 trillion, or $886,000 per household.
Total burden per household: More than $1 million!
This is, by far, the largest federal deficit in U.S. history — in proportion to household income … in comparison to the nation’s population … or even as a percent of the total economy (other than during major World Wars).
It drives the Fed to print money without restraint. It pumps up demand for scarce goods. And in the months ahead, it’s bound to be the single most powerful pressure point on public policy, financial markets, the U.S. dollar and … inflation.
Inflationary Force #2 New Lows in the U.S. Dollar
Last week, the U.S. dollar sunk to a new, one-year low against a basket of major currencies.
It’s just five points away from its lowest level in history.
And, as Mike Larson detailed this past Friday, the U.S. dollar is now being driven lower by a new, unprecedented factor:
For the first time since 1933, it is now cheaper to borrow dollars than Japanese yen, Indeed, the three-month London Interbank Offered Rate (LIBOR) on the U.S. dollar has slumped to a meager 0.292 percent, while the equivalent rate on the Japanese yen is 0.352 percent.
This means that, instead of using Japanese yen to finance the carry trade — borrowing low-cost money to buy high-yielding investments — international investors will now start using U.S. dollars to finance the carry trade.
It means that, instead of the dollar being a magnet for frightened money, it is becoming precisely the opposite — a source of financing for the risk trade.
Most important, it means that, instead of buying dollars, they have every incentive to borrow dollars and promptly SELL them in order to purchase the higher yielding instruments.
End result: More momentum to the dollar’s decline.
Inflationary Force #3 U.S. Household Wealth Now Expanding Again
For nearly two years, U.S. households were continually losing wealth. They lost trillions in stocks, bonds, insurance policies, real estate. And these losses, in turn, emerged as a major deflationary force, driving consumer price inflation to zero or lower.
Now, however, in the second quarter of 2009, that trend has reversed.
According to the Fed’s Flow of Funds released just last week, in just the last three months, U.S. households have enjoyed wealth gains of
- $1.1 trillion common and preferred stocks
- $494 billion in mutual funds
- $157 billion in real estate
These gains are still far from enough to recoup the peak asset levels of 2007. But the change in trend is enough to rekindle inflation, and that inflation is likely to take most economists by surprise.
Inflationary Force #4 Exploding U.S. Money Supply
Money pouring into the economy and chasing scarce goods is the classic cause of inflation.
But throughout 2007 and much of 2008, there was no growth whatsoever in U.S. money supply (M1).
During that period, despite the Fed’s efforts to shove interest rates down to practically zero, the total amount of money outstanding remained under $1.4 trillion — another deflationary force.
Now, however, as you can see in this chart provided by www.Shadowstats.com, the outlook has changed dramatically:
Since mid-2008, money supply has exploded beyond $1.65 trillion, with more rapid growth on the way.
Is Deflation Dead?
No. It will return.
But at this juncture, inflation is the primary concern, with far-reaching consequences on how you invest, when and where.
In the days ahead, my team and I will give you step-by-step instructions on how to protect yourself — and profit.
But first, I want to clear up a few basic points. Although we may sometimes disagree on the specific timing and magnitude of particular market moves, we are unanimous in our views about a few fundamental issues:
First, until and unless there is a dramatic change in these inflationary forces, it should be clear that the U.S. dollar’s decline will accelerate in the months ahead.
Second, despite its decline, the U.S. dollar will continue to be a viable, widely traded currency. It will not, as some seem to fear, simply disappear from the face of the earth.
Third, it is both impractical and unreasonable to abandon U.S. Treasury bills and other conservative dollar-denominated investments. They continue to provide U.S. citizens and residents the best safety and liquidity in the world today.
Fourth, the best way to protect yourself from a falling dollar is with contra-dollar investments such as precious metals, natural resources and assets tied to strong foreign currencies.
September 25th, 2009 at 10:46 am
Slowsmile: You continue to be the bearer of bad tidings.
September 25th, 2009 at 1:05 pm
There is much more to come. Wait till you read my next article concerning the dollar, gold and the Chinese yuan. The Chinese are moving very fast and openly against the dollar now. Not good…never thought they would do it this quickly…
September 26th, 2009 at 11:22 am
Inflation, deflation, booms and busts, deficits, debt, an endless stream of symbolic numbers to complicate our lives ,etc…. This economic joke, is nothing but a scam, sold to us by crafty snakeoil salesmen in nice suits. Here’s a FACT for people to ponder, it is physically impossible to sustain an ever expanding price system economy in a finite world. Knowing this, wouldn’t it be wise for us to move beyond the myth of money and politics as we gracefully enter the realm of reality for the benefit of ALL? Think about how our current knowledge about the physical laws of nature can be applied to solving problems through free and abundant energy technologies and resources by simply measuring the most energy effective or efficient ways to operate the prodcution and distribution system for the betterment of ALL of us. Move your thinking beyond the myth of private property, move beyond the myth of capitalism-imperialism- socialism-communism etc…. and get real, because reality and our knowledge about how it works is the only way we can solve our most complex problems.
September 26th, 2009 at 12:43 pm
Robert…It is a pity that you refer to the financial mess as “an economic joke” and “a scam”. You appear to believe in the power of man’s innovation with nature as a heroic reason for our natural capabilities for survival. You call money “a myth” then, after we all “move beyond the myth of money and politics”, you tortly and blandly remark that we should wisely use our minds, technologies and resources for the benefit of all. But there is one little problem here.
If the US economy and Dollar do collapse, how then are you going to pay all these wonderfully innovative people to solve these difficult world problems, which includes innovating, researching, developing, production, distribution etc.?
Therefore I would urge you to think again, if the dollar economy were to fall, which of these ideas is the proper reality and which is pie-in-the-sky?
September 26th, 2009 at 5:12 pm
Look, the Adam Smith, Karl Marx, John Nash economic model simply doesn’t work anymore. In other words they are wrong. If we expect to solve our most complex social, energy and environmental problems we’ll need a new economic model based on the science of production-distribution and consumption, without any form of belief and or mythology interfereing with our capacity to produce and distribute.
Adam Smith said, “In competition, individual ambition serves the common good” in other words, the best result comes from everyone in the group doing what’s best for themselves. Now, we applied his economic philosophy to modern affairs which created the world we see around us, it got us to a point but has it’s limitations because neither Karl Marx, Adam Smith or John Nash realized how labor would be adversely effected by an increase in the expenditure of kilowatt hours. We now produce more with less, and labor becomes more obsolete through technological advancements. So, we need to shift into a new economic model based not on a scarcity determined commodity valuations but rather on the metrics of a managed abundance of resources.
I think, that the best result comes from everyone in the group doing what’s best for themselves, ALL groups and the entire natural world through the governing dynamics of FREE energy technologies and resources. FREE meaning, without having to pay a price. (money) A token of debt, is not the best incentive and or motivation for producing and distributing. The best motivation is an innate love for contributing toward the betterment of the world in measurable ways.
To answer your question, the faith based dollar has collapsed, it’s simply being propped up by a blind faith in tokens of debt, and credit slavery.
September 27th, 2009 at 12:27 am
Robert…I would completely agree with you on most past ideological economists such as Adam Smith and Marx, their economics, although wonderfully and blindly ideal, never really covered the dirtiness and dishonesty of politics which really governs economic policy and its implementation today. You are also saying that we should return to the older concept of allowing the free markets to self-determine real value by using the simple supply and demand theory. Well, in my own opinion, we haven’t had free markets — or anything close to it — for over 100 years now, and the US government has so conveniently reached such a devotion to Keynesian and Monetarist debt economics, that I now honestly believe that they will never ever be able to pay this massive debt back — and have absolutely no intention of ever doing so.
I also confess that I do not fully understand the reality of your new model of supply and demand relying on the metrics of managed abundance energy resources. To successfully implement this — you would have to reach agreement on a new global trade policy and indeed to make it fair, there must be no economic advantage obtained by any one country. How is this possible on today’s aggravated geopolitical world platform? What we are seeing now is a massive power shift away from the US Dollar, of western wealth unstoppably moving towards creditor nations such as China, India, Russia etc., and when the power of the dollar eventually falls, so also will the power of American influence and leadership.
I would also dispute your notion that we do not need a medium of exchange — ie money, although you really submit no substitute and don’t define any alternative to replace it. How are we to obtain the goods and services necessary for our day to day existence? And where is the accommodation of individual incentive, competition, ambition, self-betterment and the “pusuit of happiness” within your theory, which are a just a few of the features that define the difference between economic slavery and democracy?
I would also fully agree with you that the dollar is currently on its way towards collapse but unlike your views, I stand by the more realistic view that soon US citizens will realize that their government is not working for their economic benefit. The cry for national survival will tumble into a realized need for personal survival and, from this point, everything could get very messy indeed. Your assumptions that the US government will eventually and honestly govern their people, that we do not need a stable national currency for exchange of goods and services and that groups of people will naturally do the right thing are, I think, very misguided. As evidence for this, just look at past economic policy and past political history.
Within your assumptions and solutions, you miss the one aspect that defies their implementation and that is — human action and behaviour. Whether by individual or by group, these actions will always suffer and be affected by the magnet of power, corruption, greed, money, lies etc. Of itself, human action, and all its apparent dirty and dishonest foibles, easily distances my thinking far away from idealistic, unrealistic extremes.
Therefore, it would seem pointless all of us shouting in agreement that we must always work as a group for the betterment of the world. Because there will always exist those other much more powerful groups that haunt the government corridors for all the opposite idealistic reasons suggested by yourself. This, also, you have not addressed. How would you usurp their vast sway and how would you repair the democratic process to assure honesty within government? And yet these quiet, influential entities still remain so solidly fixed in power — unshifted and ever regal.These corrupt forces are, if you like, the real government of America.
September 27th, 2009 at 12:17 pm
[...] post was stimulated by a slowsmile article about deflation and inflation and most specifically Comment Number 6 by the author [...]
September 27th, 2009 at 4:04 pm
Hi Slow smile,
Very well stated, I like your writing style. Since it is physically impossible to sustain an ever expanding price system economy in a finite world, why even try?
The only common denominator of all goods and services that we consume is energy not money, money is an abstract concept based on scarcity and in order to create an ‘opinion’ of value we have to somehow figure out how to waste our vital resources by keeping stuff scarce ie… the government pays farmers to throw milk away, or to burn peach fields, or they subsidize farmers not to grow crops, we under utilize solar, hydro, geothermal, and wind power, because these resources are too abundant to place a price on. We also waste our resources through foreign aid programs that contribute to the population problem, which we must sustain to help keep the economy growing. Another example is all the planned obsolescence engineered into most all of the products we consume, it’s insane, and unsustainable, so again, why even try?
The alternative is an energy accounting system based on an abundance of free technologies and resources, this proposal was first presented to us by the Technical Alliance, M.King Hubbert, Charles Steinmetz, Leland Olds, Thorstein Veblan, Howard Scott, Willard Gibbs, Nikola Tesla, Basset Jones etc…If you want to learn about energy accounting, which these men called the next most probable operating system, do some research.
A Technocracy or something similar must be implimented after the current system implodes or we simply won’t survive.