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Euphoria96 Posts: 1172 Incept: 2007-09-19 
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++++Karl, this was posted prior to the Monetary Theory Thread, I know its in the wrong place. This is my best attempt to layout the inflation vs deflation case. There are too many experts deeply divided on this issue. Please comment and I'll update as needed. 1) The Current Economic Situation To understand things, I think there are three main areas you need background on. First, the current fractional reserve banking system. Second, the international economics and trade system. Third, the US federal spending deficit. Fractional reserve banking Fractional reserve banking is a complex subject. I'll leave a video to explain everything. http://video.google.com/videoplay?docid=.... As the video explained, the current fractional reserve system requires more and more debt or the system collapses. Thus in 2000 when the markets turned sour, and the Fed was looking down a deep black hole of depression, it decided to lower interest rates to record lows and slosh out money to keep the system from falling apart. Hell, in 2000 I had a $30,000 car loan at 1.9% interest for 5 years. People refinanced houses and saw more disposable income. Bush lowered taxes, and even sent checks to everyone in the mail, giving out money to everyone, remember that? And then, we went to war which soaked up unemployment and increased spending. And thus instead of a depression in 2002, the economy recovered on extreme money/debt creation. Then something bad happened. Knowing that the consumer was tapped out and could not take on more debt, the banks started giving out interest only loans to people that had no way to ever pay it back. The banks were happy with this because they were just middlemen, they sold the MBS's to China and Fannie Mae. So as long as they didn't hold the hot potato, they could care less. CDO, SIVS, no money down house loans, and mortgage equity loans all become the norm. It kept debt increasing so the fractional reserve system wouldn't fail. In addition to interest only loans, Bush put a new law in place for credit card debt. Instead of going bankrupt and putting mistakes behind them, consumers had to pay off credit card debt even if they declared bankruptcy. This all of a sudden made credit cards profitable even if a person goes bankrupt, thus consumers were given more credit than they could possibly afford. At 30% interest, one in three people can go BK and its still profitable. Morale hazard anyone? International economics and trade system I would say you need to go back to 1971 when the US went off the gold standard to really understand things. This is when this phase in history started. It is the year that the US went off the gold standard and an entire new economic system emerged. Prior to this, the Bretton Woods system was used to keep international trade and economics in balance. To make things simple, if the US imported more than it exported, then another country would build up dollars. This country could exchange these dollars for gold. Banks back then used gold as their reserve currency. So if you exported more than you imported, you would lose gold, and thus banks had less money to loan out. If banks have less money to loan out they raise interest rates making borrowing more expensive, and thus the economy slows down, and slowing down imports. On the other had, the country that had built up dollars had more gold, and thus more money to loan out and its economy did well, and thus consumed more and imported more from overseas. Currencies also fluctuated with the amount of gold a country had. You import more than you export, and your currency falls and the exporting country's currency increases. This used to keep international trade in balance. However, this system ended in 1971. What we have had since this time is the US consuming on debt. Promises to pay in the future. One country after another has developed an export economy to feed the American consumer. First it was Mexico, then Japan, then the Asian Tigers, now it is China. One after another, each of these countries experienced a huge boom, and then a huge bust. Japan has yet to fully recover from the 1980's boom it experinced. With no feedback loop, America keep its dollar strong even though it imported way more than exporting. And thus dollars built up in central banks around the world. These dollars needed to go somewhere, and because of the massive budget deficit in the US (this is a separate issue) the US gov issued lots of US treasury bonds. All these dollars from foreign central banks then went into US treasuries, and the foreign central banks made interest on their dollars and things were good. Fast forward to today. You now had China with almost $2 Trillion in US debt/dollars. Japan also has a ****load of dollars. The oil countries have amassed huge dollar reserves. Foreign central banks have finally realized that its holding IOU's, IOU's that that the US cannot possibly pay back. So China has started to use dollars to buy US companies. Think about this over time. The US imports more than we export. China builds up dollars, and then buys up US companies, which makes China even more money to buy up more companies. Over time, China is going to own every US company. Its not only China, one Saudi Arabi Prince owns 10% of Citigroup. The current trade system is unstable, and we are watching it fall apart in 2007 right before our eyes. Federal Spending Deficit The US has been running huge federal deficits since 2000. Upwards of $400B/year. This is huge. What the US does is issue US treasuries to make up for the spending shortfalls, and dollars that were in China and Saudi Arabia (the trade imbalances) get recycled back to the US. This is also unsustainable. Now, I want to explore the possibility of a theoretical government that collected no taxes. Its possible for a government to function collecting no taxes at all. But it spends money on roads, and the military, and social security and everything else. What occurs however, if no taxes were collected, is that you have a huge buildup in dollars in the system. This is inflation. Say the money supply was $10T, and the government spent 1T a year. Then you would see 10% inflation, but you would pay no taxes. If inflation was stable at 10%, the economy could function normally and in fact flourish. Car loans would be 15%, credit cards say 20%, and so on. I'm not saying this is a preferable economy because the poor would suffer badly, but if the US government stopped issuing US treasuries to account for the federal deficit, you would see bigtime inflation as dollars built up in the system. Its more like dilution of money. 2) What is Happening Now The dollar has dropped significantly since 2000. China's unwillingness to unpeg from the US dollar is not allowing the trade imbalances to correct naturally. The falling dollar has been creating inflation in the US and pegged foreign countries. Upwards of 15% in 2007. Imports are getting more expense, and the outsourcing of America is becoming less attractive. Also, the consumer is really tapped out now. More than tapped out. And all the games that banks played to keep increasing debt are now at an end. Fall 2007, the MBS trade stopped abruptly, and all these banks got caught holding the potato. The world suddenly woke up to what was occurring and the market for buying MBS's, and SIV's, and everything else stopped. Banks are basically insolvent. They are holding billions of dollars of MBS's that are going to be be near worthless. Credit card defaults are going to go sky high. Foreclosures are goign way up. You've seen the bansk trying to hide these facts, changing accounting rules, and playing games. Banks in the past borrowed short term and loaned out long term, but this has ended with the market for commercial paper drying up. The result of this is a huge fall in stock price for these banks, and increased borrowing costs for banks because the risk of these banks going BK is very real. The Fed has lowered the Fed rates drastically. The demand for loans has deteriorated, in addition to banks hoarding cash to beef up their reserves. They have also increased the requirements for getting loans, and thus some people that want loans cannot get them. Lower initiation of new loans, and the fed rate drops. Also, with increased fear in the marketplace, people have been selling stocks and some of this extra money is now sitting in banks. Money markets, and pension funds that invested in MBS and similar securities are losing money for investors. In the stock market, some stocks are at all time highs, while others are at all time lows. The reason being is that the dollar's fall has helped out international companies, and these companies have had an increase in earnings. Those companies without international exposure, have been suffering seeing the inflation and consumer cutbacks. Other stocks such as banks and homebuilders are basically BK plays at this point. How to solve the problems To bring the international trade into balance, the dollar must fall. The US needs to import less and export more. This means stopping importation of so much oil, and also increasing our manufacturing base in the US making our own goods. This has to happen, there is no way to avoid this. It also means making sure that other countries don't devalue their currencies faster then the US devalues, otherwise we end up in currency wars and tariffs being used. In the banking sector, the firms that made bad loans need to go under. Additionally, the depositors need to feel the pain when their bank goes under. If the depositors are not bailed out, then depositors will flock to conservative banks and the banking system should regulate itself. For-profit banking needs to be made illegal. Greed will ensure this is repeated in the future. Banking serves a critical role in the economy. Making banks non-for-profit, and regulated to standards will ensure the morale hazard does not occur again. Actually, non-for-profit banks should be able to provide even cheaper credit to consumers since no profit is in increded in the interest rates. This will be good for the economy. When someone goes Bankrupt, allow them to completely remove all debt from their record. This puts the burden on the lenders. Credit will not be given out as candy, and people not responsible won't get credit. BK rates will go way way down. Also, if something really bad happens, like a medical accident, then someone need not be slaved away the rest of their lives. Constitutionally require that the trade balance be neutral over say a 10 year period. If the trade balance gets out of favor, constitutionally require tariffs and a lower dollar. Constitutionally allow exceptions such as in times of world war, but constitutionally require that post war periods be made up for. This will keep politicians in check. Constitutionally require that the US government not be allowed to issue debt, except in times of world war. If there is war, require post war period be paid off immediately following the war. Notice how I did not require a balance budget. If the US government has a slight deficit, its not a big deal. If the deficit becomes large, and if you can't issue US treasuries to mop up the extra dollars from the US gov overspending, then inflation will occur in the economy and people will see this. We currently spend 30% of our taxes on interest on the federal debt. Think about how much farther our tax dollars will go. The Case for Deflation Deflation simply occurs when money/credit contracts. The banks have taken massive write downs, and credit is drying up. On top of that, you also have supply-demand imbalances that favor price deflation (as opposed to monetary deflation) the supply of goods and services exceeds the demand. In housing, there have been more homes built then people need. When the recession hits, people are going to get roomates because they need money, or move in with family. The supply of homes will be much greater than demand, and current calculations have not factored in the whole "roomate" factor. In services and goods, the consumer is tapped out, and this will drop the demand for goods. Companies will drop prices to maximize their profit, even if they need to sell products at a net loss on each product. Think about cars, you have this huge capital expense to build factories and tool the machines. If you sell no cars, you still have to pay expenses on the factory. So it may be economically smart to sell cars even at a net loss to recoup some of your capital expenses. We know already that its going to get more expensive to borrow money from banks. Increased borrowing costs means things get more expensive to buy on credit, and thus some people can't afford things and thus the demand drops causing deflation. The banks's reserves are also taking a big hit, so they will have less money to lend out additionally. The shear destruction of investment money is going to cause a decrease in the money supply. Money markets going for 96 cents. Housing prices going down. Stocks going down. People will pull back consumption when they feel threatened, and they see their investment accounts going down. The destruction on the consumer is also going to affect company investment, as they pull back on capital spending and all these Cisco routers sit on Ebay ready to be repurchased. All this worldwide pullback is going to decrease the demand for oil. Cutbacks in FedEx, in vacations, in business travel, in energy, in factory production. While the dollar might fall, the decreased demand should outweigh the dollars effect on price. People are going to be laid off, and need to find new jobs. Service jobs are going to be hit hard, and people will move back into manufacturing. High unemployment is going to decrease real wages as people compete for jobs. Everyone has levereged up in loans. Hedge funds, banks, they have borrowed tons of money. At some point, this is going to deleverage and when it does money will be in high demand with everyone trying to get money to pay off their debts. This will occur with both companies and the consumer. Increased demand in money causes deflation. "At some point, a rising debt level requires so much energy to sustain, -- in terms of meeting interest payments, writing bad loans, chasing delinquent borrowers -- that it slows overall economic performance . A high debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit." Prechter, Robert. Conquer the Crash. "The mass of credit that has been nurtured into the world is like having raised King Kong from babyhood as a pet. He might behave, but only if you can figure out what he wants and keep him satisfied" Prechter, Robert. Conquer the Crash. The Case for Inflation China and India have been growing at extreme rates. Their growing wealth and population is increasing demand for everything from oil to sugar. When China stops exporting to the US, its going to buy the goods for itself and start consuming. This will be a huge boom for China and India and their markets become self-sufficient. Think off it this way. You have 10 Asians and 1 American on an island. The Asians work all day long supporting the American in exchange for IOU's. Eventually, the Asians stop supporting the American and now the Asians can consume more themselves instead of supporting the American. ** I want to point out that this didn't happen for any of the Asian tigers or Japan. History suggests this scenario will not play out. Think back to the 1980's and everyone thought Japan would grow forever, its stock market has yet to even come close it its high in the 1980's. The US gov is going to try to decrease the US dollar to counter deflationary trends and overall inflation should overpower deflation. The problem I have with this is that it does not take into consider the strength of other currencies. The US has vast natural resources, the best education system in the world, forests, land, food, 25% of the worlds coal, 5% of the worlds oil, great transportation system including rail and waterways, lots of water, a diversified economic system, and a stable gov that has existed for over 200 years without major change. If you had a choice, do you want your money in dollars, or say the Yen? The Japanese have even more debt than the US and have shown time and time again they will devalue their currency to maintain their manufacturing export economy. The Euro is not a bad bet, but it does have issues. For example, what happens if say Germany gets ****ed about a high Euro because its export business is going away, and Germany decides to break from the Euro? What about France and its aerospace business as Boeing takes away the Airbus business from having a cheap dollar. I will have to say that the dollar continues to fall and the Fed and US gov do not appear to be too worried. The US is going to print off enough money to create inflation. Well, under what mechanism are they going to do this under? How are they going to distribute the wealth evenly? Tax cuts? Gov lotteries of free money? The US won't do this until things get real bad and there is no other choice, aka a deflationary depression. They need public buy-in to hyperinflate, and this only happens when things get really really scary and there is no alternative. As the dollar falls, China is going to flood the US with dollars as punishment. The problem I have here is that its not in China's interest to do this. Additionally, if the US falls into recession, China is going to need all the money it can get to keep things from really getting bad. China holds US treasuries not cash, so this threat is baseless. As China depegs from the dollar, everything is going to get cheaper in China and they will start buying more oil and commodities. The masses in China are dirt poor. Even if the dollar/Yuan moves 30%, I don't think you'll see every Chinese with a car. China will enter a recession just like the US, and supply will overpower demand across the board on commodities. How to Invest Now Cash is king in a deflationary recession. If you want, shorting or LEAP Puts would be a double whamey, as you make money as stocks go down, in addition to the relative purchasing power of the dollar increasing. Gold would be a long term hold since eventually the gov is going to hyperinflate its way out of this mess. But expect gold to decrease in value in the near term. Final Thoughts The case for inflation is very seductive. The problem is that the permabulls have convinced everyone that the bull market is in gold and oil and metals. They have been successful in making believers out of people because they are right about inflation (sort of), because eventually the US gov is going to hyperinflate out of a huge deflationary spiral. What they don't tell you is that we are looking at huge deflation before the hyperinfaltion begins. I think we see deflation. If I'm right, and I'm being contrary to the news and CNBC and Peter Schiff (and the contrarian investor usually wins) you will make fortunes shorting at this point, and then buying back when stocks and gold and everything is at historic lows. If I'm wrong, well you have an inflationary depression on your hands, where not only are people out of a job, but gas goes to $10/gal and people can't afford to eat. You'll have mass riots and profitable investments will be very limited. Also, what would hyperinflation do to the bankers? What would hyperinflation do to MBS's? What would hyperinflation do to car loans if banks received 6% fixed interest from consumers but had to borrow at 10%? Now, what would deflation do to MBS's and fixed rate bonds that the banks own? Do you want to fight the bankers? Make no mistake, whatever happens the world's economic system is about to change. It has too. These next few years will be interesting. The deflationists and the hyperinflationists are both right. Its just a matter of which order they occur in. ************************************************ Its been a few months since I wrote this. I do see some trends that are beginning to concern me. The dollar is really starting to collapse. Australia is raising rates, and the ECB is holding rates steady, thus the worldwide re-inflation that many predicted doesn't look like it will play out. The Fed hasn't been printing off permanent market operations, and the money supply has been contracting. Even the so called $150B bailout is being used from 08 taxes. On the other hand, gold has skyrockered, oil and food inflation is picking up, and even base metals have rebounded strongly. The TAF has injected $60B and the TOMO is up to $60B also. The US gov has injected $150B in short term credit, Moodys and S&P have shown the outright fraud by keeping MBIA and Ambac with their AAA rating. Risky loans continue to be spread all over and malinvestment continues, encouraged by the Fed. The Fed has so far shown hesitation to punish risky loan activity. If this route isn't taken, and banks aren't allowed to go BK, then the only other alternative is hyperinflation. Its still a tough call to make, but I think Ben needs the political go ahead to print off ****loads of money. To get the headnod, he needs a real market crash. The banking system owns so much crappy CDO's and MBS's that are going worthless, the banks may decide they are better off with hyperinflating houses to try to intice buyers. We either enter severe hyperinflation, or a very strong and fast deflationary credit collapse. Without a severe market correction, I don't think the Fed can do much at this point. They lower rates further, they cause a dollar collapse, causing large defaults on the banks and more deflation. Eu Last modified:
2008-03-04 00:18:05 by euphoria96
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Pika-steph Posts: 37242 Incept: 2007-09-11
^Why I keep^ fighting; so he is not fighting for nothing.
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Damn Euphoria - I think you covered it all! I like that you gave all sides of the argument. It makes the case that much more convincing. The final thought is the credit market. As Karl has said, and the Treasury technicals have shown, the 'smart' money is NOT leaving the US Dollar. If that changes, then one would have to re-assess the deflation scenario. As for me, I've followed, the smart money right on into Treasuries. ---------- Stop the Looting; Start Prosecuting - http://www.FedUpUSA.org  "America is at that awkward stage. It's too late to work within the system, but too early to shoot the bastards." 2007-11-18 02:41:07
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Euphoria96 Posts: 1172 Incept: 2007-09-19
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I'll fix the spelling when I sober up tommorrow. :_)
2007-11-18 02:55:05
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Pika-steph Posts: 37242 Incept: 2007-09-11
^Why I keep^ fighting; so he is not fighting for nothing.
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And the nose on your smiley. 
---------- Stop the Looting; Start Prosecuting - http://www.FedUpUSA.org "America is at that awkward stage. It's too late to work within the system, but too early to shoot the bastards." 2007-11-18 03:10:58
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Pikachu Posts: 4862 Incept: 2007-08-24 
Down under
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I am no expert but I remember reading in that huge thread where this issue was debated that the crux of the issue came down to - Is the US too big to fail ? > The inflation side said no (i.e. Rome) and that international funds will go elsewhere (USD tanks totally). > The deflation side said yes and the flight to safety will be to the USD (USD flies). You have discussed this above, but maybe more detail as this seems to be the central point of disagreement between the 2 camps ? Also, how about hyperinflation b4 deflation ? Or is that not a possibility ? 2007-11-18 04:00:06
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Agi Posts: 194 Incept: 2007-10-21
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Excellent for a first effort. You state under the caption, "How to solve the problems" that, "To bring the international trade into balance, the dollar must fall." Well that's the point the "inflationists" (at least myself) are making. I've never claimed that holding dollars would be the worst possible asset to hold at the present time. I'd rather hold US dollars than buy most US stocks or residential real estate in Florida over the next year. But if you are saying the dollar must fall, fall against what? I presume you mean other currencies, including possibly gold, which is looked upon as an alternative to fiat currencies by many, including Central Banks. (Schiff has stated on at least one of his broadcasts that he'd rather hold Nasdaq stocks than US dollars, but he was talking about longer time frames than the next year, and was anticipating an inflationary government response to falling stock and real estate prices). Once you grant that the US dollar is going to fall (against other currencies presumably), then you need to consider the ramifications of rising foreign purchasing power and reduced US purchasing power in more detail. There are other changes and improvements that could be made to your summary, but again you've made a very good start. Last modified:
2007-11-18 05:55:11 by agi
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Gmak Posts: 10176 Incept: 2007-07-27
Re-inventing the future at the speed of time.
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One adjustment:Quote:
This is not deflation. It is supply /demand imbalances. That is a whole other ball game. It is one of the most persistent fallacies that inflation and deflation refer to the prices of goods and services. Deflation is when the money supply contracts more than the productive capacity of the country. Since the fractional reserve system (in its present incarnation) treats debt like money, this includes a contraction in the total debt outstanding. IF the money supply doesn't change size, falling prices in one area mean that prices would go up in another area. The total money supply gets "used". Deflation is when there is less money (and debt) for the same, or more, goods, services, and assets. Inflation is when there is more money (and debt) for the goods, services, and assets. If lenders have B/S in distress (increasing debt defaults and other assets going bad), and /or borrowers cannot or will not borrow any more, then a credit contraction (and thereby deflation) is almost inevitable - no matter how much a CB "pumps" money into the system. Remember, the biggest creators of money - through debt - are the financial institutions. This includes banks, but also the SIVs, conduits, and other sources or credit. All the FED can do is increase / lower the target rate and discount rate. The target rate is the "price" of money. The FED is then obligated to supply as much money as is demanded at that price by the system. This shows up through the bank's needs to meet deposit rserves. If the banks don't want, or don't need any liquidity, then the FED can supply as much REPO as you could imagine, and none will enter the system. They can also increase / decrease liquidity through permanent operations (the REPOs are temporary operations). They do this by buying or selling Treasury Bills and Notes. SUMMARY: Inflation or Deflation, by definition, is an increase or decrease in the money supply (including credit these days) that exceeds the change in productive capacity and assets. 2007-11-18 10:01:45
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Horacetabor Posts: 443 Incept: 2007-08-26
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Here's my simplified version. If you're a deflationist then you believe the central banks will fail in their mission to reanimate the commercial paper markets, and to hide all the toxic debt currently marked to make believe. If you believe this, by logical extension you should also believe that we will experience a complete collapse in the financial system within the next several years. Banks will fail. FDIC quickly rendered insolvent. all Credit wll freeze. It's difficult to imagine conducting business in this environment. Do we go back to a barter system? On the Inflationist side you believe that the central banks will solve the forementioned problems by expanding credit, printing money, throwing it any direction that the banks think will help the situation, and by coming up with clever and in many respeccts insidious solutions. I'm an inflationist for at least a few more years. By Deferring FASB 157 and creating the Super SIV?Conduit, the evidence is out there to suggest that the cbs will continue to use every trick in the book to stave off the worst case scenario. ---------- "Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets . . . [but] in the absence of the gold standard . . . there is no safe store of value,....Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidi Last modified:
2007-11-18 10:30:31 by horacetabor
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Gmak Posts: 10176 Incept: 2007-07-27
Re-inventing the future at the speed of time.
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Expecting deflation does not lead to a belief that the financial system will collapse. Did the financial system collapse when the Latam sovereign debt bubble died? No. But there was a credit contraction. It is NOT A LOGICAL EXTENSION from deflation to financial system collapse. Less debt does not a collapse make (Yoda). FASB 157 has NOT been deferred. You are posting so much misinformation, you should take a step back and reconsider. Misinformation is a cardinal sin IMHO. You are projecting that you are knowledgeable about what is going on, but your statements show that you are missing a number of key pieces to the puzzle. Stop projecting to extremes, re-examine the evidence and facts, and re-think your conclusions. 2007-11-18 10:32:58
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Fletchjr Posts: 776 Incept: 2007-07-26
Minnesota
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This issue gets debated more than any other. I have been on the side of inflation because I am simple-minded and ignorant. I only look at the trends and history. I only observe what is actually happening, but that is maybe not enough. The more educated argue for deflation. What I want to know is what causes some economies to wind up with hyper inflation and what are the conditions that bring deflation. The deflation folks point to our GD or Japan and say, "there, that's what we are going to get again." The inflation folks point to Weirmar Germany and say that is our future (maybe not that extreme). What are the underlying conditions that cause one poor economy to deflate and one to inflate? Is it a credit bust that causes deflation? Is it high public and foreign debt that causes inflation? As I say, I'm not real bright about these issues and I can see both sides. I want to know what countries have had very high levels of public and private debt and wound up with deflation. If there are examples of this, that would place me in the deflation camp. 2007-11-18 10:49:28
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Snooze Posts: 1560 Incept: 2007-07-09
florida
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If I were one of the mythical PTB, and held debt backed by tangible assets and was secure in my priviledge to continue the debt as money paradigm... I would always choose Deflation over hyperinflation as the most advantageous route to resetting the imbalance. A financial system set up to protect creditors at the expense of debtors logically will use it's built in advantage to maintain it's paradigm. The short term accounting imbalances are nothing more than business cycle disruptions inherent to the paradigm. If you are a debt merchant, your real asset is the paradigm itself. ---------- The past is the prologue of the future. BOHICA 2007-11-18 10:56:00
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Swingtrader Posts: 5544 Incept: 2007-08-12
United Oligarchic Goldman Sachs States of America
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snooze wrote..
An excellent point. No wonder this issue gets debated so often - if you're right or wrong on how it turns out will likely mean whether or not you're on the best side of the trade. Plus, as Gmak has pointed out, there is a lot of misinformation that gets quoted as fact, and various tinfoil issues run through and along with it. ---------- Vegasradar wrote.."Political correctness is a doctrine, fostered by a delusional, illogical minority, and rabidly promoted by an unscrupulous mainstream media, which holds forth the proposition that it is entirely possible to pick up a turd by the clean end." 2007-11-18 11:03:24
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Horacetabor Posts: 443 Incept: 2007-08-26
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Okay GMAK, to be fair there was a partial deferrment of FASB 157. The rest is up to interpretation. "The Financial Accounting Standards Board reaffirmed an earlier vote against a blanket deferral of Statement 157, "Fair Value Measurements," but granted a deferral for some assets and liabilities. The board decided that for fiscal years beginning after Nov. 15, 2007, companies would still be required to implement the standard for financial assets and liabilities as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. That means Statement 157 becomes effective as originally scheduled for the financial assets and liabilities of financial institutions. That has proven to be a challenge for many of these institutions this year, in the wake of the plunging credit and mortgage markets. The decision not to defer fair value measurements means they still will need to maximize the use of any observable market inputs. However, FASB did decide to defer for one year the implementation of Statement 157 for other nonfinancial assets and liabilities, such as those arising from business combinations when a company acquires another's assets. An exposure draft will be issued in the near future on the partial deferral." http://www.webcpa.com/article.cfm?articl.... But more germane to the argument, let's talk about my linkage of the deflationary scenario (marked to make believe assets are given proper valuations) to a financial collapse. What are the consequences of Citibank going under, which is what I expect if the extent of their losses comes to light. It will set off a chain reaction? causing other banks to declare their exposure and overnigt you have a handful of the worlds largest banks, broker dealers underwater and insolvent. This will in turn take down the insurers. The counterparties to JPM 70 trillion derivativesbook will evaporate. and I could go on and on. I'd call that financial armageddon. ---------- "Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets . . . [but] in the absence of the gold standard . . . there is no safe store of value,....Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidi 2007-11-18 11:06:08
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Swingtrader Posts: 5544 Incept: 2007-08-12
United Oligarchic Goldman Sachs States of America
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"Statement 157 becomes effective as originally scheduled for the financial assets and liabilities of financial institutions" Well, the above statement is the truly important part that will have a major effect. IMHO, you are technically accurate, but for realistic purposes of discussion of the current topic, Gmak is essentially correct. As to Fletchjr's question - I'm not sure previous historical examples are of great help in accurately predicting the outcome. There's never been a situation this complex, with the huge amount of derivatives, tremendous leverage, etc - I believe that Gmac is very correct in saying that deflation does not specifically lead to a financial collapse. Actually, I am long Au/Ag and have been in the hyperinflation camp for a number of years. Even so, when I have seen people as bright as NoThing, KD, Gmac and others articulate the deflation theory so well it would be foolish to ignore what they are saying. One truly critical thing here is what happens to the dollar. I'm not sure that can be predicted. I'm not selling any Au/Ag at this point, and have been going cash and soon to add some short/puts. There is one real problem, IMHO with severe deflation being the alternative - I am of the mind that severe deflation will likely bring about "social unrest" in the streets of the US. If I am correct, will what is left be a suitable framework for the bankers/holders of assets? What about war? On a wider scale? Historically, this has been the solution more times than not when a nation was on the ropes financially. These guys have demonstrated a willingness to ramp up war in a big way. Plus, I'm not sure that whatever options Bernanke and Paulson come up with will be deflationary in nature, and try they will. Having said all of that - NoThing, KD, Gmac and others here have made the best arguments I have seen from the aspect of people who know how the money system works. Sooo, I'm up on the fence leaning firmly, swaying even towards the deflationary camp. I've thought about selling Au/Ag but haven't been able to bring myself to do so. Basically, I'm saying that I believe Gmac, NoThing, KD are essentially correct in their analysis - BUT, and it's a big BUT, I'm not sure that scenario gives social, political and geopolitical considerations due weight - ---------- Vegasradar wrote.."Political correctness is a doctrine, fostered by a delusional, illogical minority, and rabidly promoted by an unscrupulous mainstream media, which holds forth the proposition that it is entirely possible to pick up a turd by the clean end." Last modified:
2007-11-18 11:41:44 by ciga
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Gmak Posts: 10176 Incept: 2007-07-27
Re-inventing the future at the speed of time.
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Deflation does not mean Citibank goes under. If Citibank goes under, and there is extreme distress on the financial system, it is not an extension of deflation. It may result in deflation, but there are many many scenarios leading to deflation. Do you want to discuss financial system collapse or deflation? I still go back to the Latam debt crisis and the S&L crisis as proof of human ingenuity in resolving what was THEN THOUGHT TO BE a system crashing black swan. Excess is excess in lending, but it can be dealt with. THe solutions may not be very tasty to Americans who don't want anyone buying their cherished money printing institutions, but solutions do exist. So, I don't want to debate whether the financial system will collapse or not. I don't really care. If one collapses, another can be built to replace it. It just means a new currency, and real re-capitalization. 2007-11-18 11:41:09
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Bw8472 Posts: 6446 Incept: 2007-06-28
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Well it's helpfull to see what powerhouse money has to say about the issue. Currently I believe a cut is priced in on the FF of at least a quarter yet Gold, Silver and oil are off. The 10 year is cratering on yield. So far the market says deflations comming. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2007-11-18 11:43:17
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Bozonian Posts: 13051 Incept: 2007-09-01
PFT - Pure F'n Tin
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The FED can stop deflation easily by lending at really low rates. Right? And deflation is worse than inflation. Perhaps what we have RIGHT NOW is the Fed battling the deflationary aspects of millions of mortgages going bad by lowering rates. Bernanke blames the duration of the Great Depression on the Fed not feeding cheap dollars into the system. It's almost a guarantee that that won't happen again if he has anything to say about it. ---------- If deficits don't matter, then the Federal Government can borrow the money it needs and stop taxing the citizens. Everything I write is my opinion and not to be considered proven fact. Nothing I write should be considered financial advice. 2007-11-18 11:59:09
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Gmak Posts: 10176 Incept: 2007-07-27
Re-inventing the future at the speed of time.
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The FED can lend at really low rates - but only if someone will borrow from them.
2007-11-18 12:02:00
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Guydaley Posts: 10361 Incept: 2007-07-10
Missouri & Wyoming
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Definitely a great topic of discussion. We could have economists tell us whats happening, financial leaders, historical financial books for illustration and common sense examiners like we have here in the ticker forum and have a nice tug-o-war about what we have now and what we might have in the near future and future (inflation or deflation). Would anybody deny that its a matter of perspective? For example if a consumer has his groceries and gas going through the roof and his home value is falling by the day, he has neither inflation or deflation because the individual doesn't matter and only macroeconomics does? I believe Nothing said that price inflation mustn't be confused with real inflation (I think). The ONLY thing we (as individuals, breadwinners, survivors) need to know is; what is happening, what will happen and what we can do to protect ourselves (or maybe improve our situation) in the coming chaos and confusion. Call it "indeflation". For a lot of people it won't matter what you call it, they aren't going to plan or prepare in anyway. Me? Play the stock market in the short term, (now through end of 2008 probably), build a war chest and see if the US or some other place is better to weather the storm. ---------- 2/17/09 = Hogzilla bill was signed = THE POINT OF NO RETURN = Cheers to the Reset, LONG LIVE THE UNDERGROUND ECONOMY! STARVE the BEAST! Adopt a J6P. 2007-11-18 12:04:24
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Enfinity Posts: 1488 Incept: 2007-09-12
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I will buy every US bond if the Fed or anyone else wants to give me the money at the right interest rate...I will even hold them to maturity!
---------- Disclosure - I've been known to talk my book. 2007-11-18 12:06:56
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Fletchjr Posts: 776 Incept: 2007-07-26
Minnesota
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Low rates haven't helped Japan end deflation. Why buy today when it'll be cheaper tomorrow? 2007-11-18 12:13:51
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Bw8472 Posts: 6446 Incept: 2007-06-28
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When was the last time you got a CC offer from the FED? Yeah, never, they don't set rates the worldwide captial market does, ie Japan does, we've had artificially low rates for a long time due to them, it's wormed it's way into our monetary policy and it's bubbled us up like they did and we will all suffer their same fate for it. We got some inflation out of it we didn't want, a lot of it we liked, ie house prices rocketing, that was in effect hyperinflation. Now comes act 3, the grand seeping destructor, thanks Japan, you ****ed us all up. The game changes to deflation on fear of loss, we have that in spades, the fear holds banks back, credit contracts, down you go, it's pretty simple actually. To believe in hyperinflation you have to have a bypass mechanisim for lending, and that would be in this case printing money and handing it out, not through loans mind you as bankers won't cooperate, the marginal credit folks run the economy on the margin, good credit folks aren't over spenders by definition, over spenders got us where we are and their balance sheets are bloated to all hell with debt, banks aren't going there anymore. Once you see the average joe get like 20k a year from Uncle Sam for the inflation effort let me know. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2007-11-18 12:34:15
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Etrade_refugee Posts: 4873 Incept: 2007-11-14
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Quoted for imposterity: Euphoria96: "For-profit banking needs to be made illegal. Greed will ensure this is repeated in the future. Banking serves a critical role in the economy. Making banks non-for-profit, and regulated to standards will ensure the morale hazard does not occur again. Actually, non-for-profit banks should be able to provide even cheaper credit to consumers since no profit is in increded in the interest rates. This will be good for the economy." Are you insane? Are you seriously talking about jailing someone who provides banking services for profit? How about we just make all businesses not-for-profit while you wave your magical economic wand? Won't that provide even cheaper services to customers since no profit will be included in the prices? Every time the economic system experiences convulsions because of artificial government or Fed influences there is a vocal and insidious group always calling for greater restriction on the free market, personal contract, and always flying the ostensibly "morale" banner of anti-greed. While the principal formulation of socialism is "public" ownership of all means of production, in today's financial and service based economy the reduction of all banking to the status of a public utility effectively acheives the same goal. And it's much easier to sell. My greatest fear concerning the coming economic difficulties will be that more and more of your foggy-headed ilk will crawl into the light and vomit forth your malformed opinions until it becomes a matter of public discourse and we are all drowned in the resulting flood. ---------- Current best estimates (6/17/2009): CAR - 39 - 60 percent CFR - 2 - 10 percent Numbers are for the period 5/1/2009-4/30/2010 2007-11-18 12:36:53
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Bw8472 Posts: 6446 Incept: 2007-06-28
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No he's not saying that at all. It's a very simple concept, profit by means of production is fine, and facilitation of production is fine. He's saying that money, not debt but money, is a medium of exchange, when you hand the power of it over to debt merchants you've handed the game over to a player in the game. The money is simply a transfer mechanisim of trade, it should be a sacred NEUTRAL part of the trade. Central banking allows one force to gain control over the flow of trade, it's like the biggest power you could ever give anyone and we don't even know who the **** they are. I think for simplicity sake I'll take his arguement and make it my own with apologies to him. One small bank charging you a percentage to use their money is not a problem, a central bank that controls the money supply and monopolistically sets rates is giving yourself prostate to that entity each and every time you use money. That's what should be banned forever from earth. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2007-11-18 12:44:03
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Wyocowboy Posts: 3505 Incept: 2007-08-17
Wyoming's Rocky Mountains
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I have what I believe is the perfect translation for everything I have read the past couple of days on inflation or deflation. Lets see: Sniper rifle, semi automatic shotgun, semi automatic pistol, lots and lots of ammo, several big dogs, a good well, plenty of gas, lots of flour-salt-sugar, a couple of generators. That covers the basics. Then just sit back and trade this the best one can until the final scene plays out and hope you get to keep the financial bounty of your work. ---------- An excuse is nothing more than an explanation of failure. Churchill A government which robs Peter to pay Paul can always depend on the support of Paul. George Bernard Shaw 2007-11-18 12:44:04
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