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A Year of Deflation Coming Up?

by John Rubino on September 6, 2012 · 45 comments

Being deeply in debt is like being grossly overweight. You’re carrying around this extra baggage that slows you down, and without continuous, conscious effort you tend to stop moving.

That’s the situation in which the world finds itself. The debts accumulated in the past couple of decades are weighing down the major economies, threatening to pull them back into recession if not countered by massive deficit spending and monetary ease. This, according to the following Bloomberg article, is causing prices to fall in most sectors:

IPhone Price Cuts Send Bond Inflation Bets to 11-Year Low
Price cuts on everything from iPhones to Folgers coffee show why investors in U.S. government bonds anticipate low inflation for the next decade even as the Federal Reserve considers injecting more cash into the economy.

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, has averaged 2.54 percent this year. That’s the lowest since 2001 for the measure, which gauges expectations for inflation between 2017 and 2022. Economists surveyed by Bloomberg forecast that 10-year government bonds will yield 1.76 percent by Dec. 31, down from 2.76 percent in 2011 and 3.19 percent in 2010.

Bond yields show investors expect that soaring gasoline and corn prices will fail to spread throughout the U.S. economy amid a slump in wages and unemployment at more than 8 percent since the beginning of 2009. That’s giving the Fed scope to add to the $2.3 trillion of government securities it has bought since 2008, an option Chairman Ben S. Bernanke said last week is possible amid “grave concern” about joblessness.

“The bond market doesn’t view inflation as a problem,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $350 billion of assets, said Aug. 28 in a telephone interview. “The bond market still views deflation as a greater risk to the economy for the next one to maybe two years.”

‘Constrained’ Budgets
Retailers are responding to sluggish economic growth by cutting prices. Sales rose 0.8 percent in July from the previous month, the biggest increase since February, government figures showed Aug. 14. That followed three straight months of declines, including a 0.7 percent drop in June, the most since May 2010.

“What we’re suffering through in the job market is reverberating through the economy,” Adolfo Laurenti, deputy chief economist in Chicago at Mesirow Financial Inc., which oversees $61.7 billion, said in a telephone interview Aug. 27. “These lackluster sales at many major retailers are really reflecting the fact that budgets are still constrained.”

Average hourly earnings rose 1.7 percent in July from a year earlier, the smallest increase since December 2010 and down from a peak of 3.8 percent in June 2007, the latest Labor Department data show. The Bloomberg Consumer Comfort Index was little changed at minus 47.3 in the week ended Aug. 26, from the prior reading of 47.4 that was the weakest since January.

Price Cuts
J.M. Smucker Co., which owns the Folgers coffee brand, lowered retail prices in May by about 6 percent as Arabica bean prices fell. Orrville, Ohio-based Smucker sees lower coffee costs for the remainder of the year, President and Chief Operating Officer Vincent Byrd said Aug. 17.

Procter & Gamble Co. (PG), the world’s largest consumer-products company, rolled back $400 million of the $3.5 billion in price increases it made last year, Chief Financial Officer Jon Moeller said Aug. 3 during a conference call. The move boosted Cincinnati-based P&G’s U.S. market share of laundry detergents, including category leader Tide, by 0.6 percent in July, he said.

Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) cut its price for Apple Inc.’s 16 gigabyte iPhone 4S to $148 from $188, which was already cheaper than the manufacturer’s suggested retail price of $199. Second-quarter sales at Wal-Mart’s U.S. stores open at least a year gained 2.2 percent, below the 2.6 percent in the previous quarter, the company said Aug. 16.

Wal-Mart Cuts
Wal-Mart cut prices on paper household products by 14.1 percent in August from a year earlier and health and beauty aids by 13.7 percent, according to Bloomberg Industries data. The cost of laundry goods has climbed 18 percent since September 2010 at the stores, while household paper items have increased 2.3 percent, the data show.

The company announced a program discounting gasoline by 15- cents-per-gallon on Aug. 29. The average U.S. price of a gallon of regular unleaded gasoline has risen 16 percent this year to $3.80, according to AAA.

“Our customers are under pressure from the economy,” Duncan MacNaughton, chief merchandising officer for the world’s biggest retailer, said that day on a conference call. “We have always had aggressive prices on gas. This takes it to the next level.”

A measure of prices tied to consumer spending was the same in July as in the previous month, according to an Aug. 30 Commerce Department report. The core personal consumption expenditure deflator, which excludes food and energy costs, rose 1.6 from a year earlier, down from 2.2 percent in March.

Price Index
The consumer price index was unchanged for a second month in July after plunging 0.3 percent in May, the most since December 2008, according to the Labor department.

Food price inflation caused by the worsening U.S. drought, as well as higher gasoline prices, is being offset by employment and wages that have failed to recover sufficiently, Valeri said.

Corn has surged 57 percent since June 15, reaching a record $8.49 a bushel on Aug. 10, as the drought parched millions of acres across the U.S. Soybeans gained 33 percent since mid-June and reached a record $17.605 a bushel on Aug. 27. Oil touched a 15-week high of $98.29 on Aug. 23, and gained 20.9 percent on Aug. 31 to $96.47, as Tropical Storm Isaac strengthened, crimping output in the Gulf of Mexico.

“The real driver of inflation is labor costs, how much people are making,” LPL Financial’s Valeri said. “Salaries aren’t increasing much at all.” Valeri said he favors intermediate-maturity corporate bonds because “interest rates are going to stay low for a while.”

Some thoughts
To summarize, prices for grains and oil (and health insurance and college tuition) are way up but since wages are stagnant, higher prices for some things leave less disposable income for other things, which fall in price due to reduced demand. The increases and decreases tend to cancel out, resulting in low or no inflation, and maybe, if the process gathers momentum, deflation. That’s the story of the coming year.

Now the question is how governments will respond. If their goal is to inflate away their debts, then they will, very soon, open the monetary floodgates and give us the much-anticipated global coordinated quantitative easing. In which case by late 2013 we’ll be back in inflation mode, with soaring commodity prices, falling currencies and a general sense of things spinning out of control.

But what if near-term inflation is not their goal? As reader Bruce C noted in a comment on a previous DollarCollapse article:

I’m still unclear on what the Fed’s (and all of the big central banks’) real agenda is. I know the official and conventional belief is that the Fed works for the benefit of the US, and that all the other central banks are exclusively concerned about their own country of domicile, but that is not necessarily true. Another perspective is that the central banks form a global cartel that is primarily interested in a global consolidation of the banking and financial system, often described as “a one world government with a single currency.” I honestly don’t know if, or the extent to which, that conspiracy theory is true, but I think we are all going to find out pretty soon. I say this because the way things have evolved so far all over the developed world is a perfect opportunity to usher in global governance, if that is their intention. Basically, what I’m saying is IF the Fed or the ECB initiates a significant level of “monetary stimulation” relatively soon then I submit that the one-world conspiracy theory is wrong. Stated differently, by holding back on additional monetary aid the resulting economic chaos will foster the level of desperation required for Westerners to accept global “solutions”. Watch what is actually done going forward, not what they say.

Agreed. The global slowdown is forcing policy makers’ hand. Either they ease big-time (as yesterday’s announcement of ECB bond buying indicates that Europe may do), in which case growth and inflation are their near-term goals. Or they wait and let the recession turn into a depression – which it will if not fought with more credit – implying that we’re being softened up for something even more dramatic.

Doug

Very interesting, pointing out the need to hold both gold and cash because nobody yet knows how this wil play out. In fact, even if we have deflation and cash is king, gold should do well simply because it carries with it no counterparty risk.
Ruben

Somebody have think about it if the bigpicture is about the dolar privilege as world wide reserve currency and the ‘status quo’ of the present structure of power stablished after the WWII? have somebody take a look to the IMF COFER about the world central banks currency holdings labeled as “unallocated” and how this percentage have change from 2001 with a 22% of the total holdings on currencies and 1Q2012 those “unallocated” reserves are more than 45% of the total? (so basically in 2001 we know the 78% of the total and today we only know the 55%… somebody think that that 45% unallocated reserves have the same distribution % of currencies than the other 55%) because from my point of view which is the rational to have passed from 22% to 45% as unallocated (so unknown) if would go to show the same picture?
- http://JoinAmericaAgain.com DM Zuniga
  
  Very well put; cogent and to the point. ;o)
mark hagen

My feeling from observations is that any items not required for living are being cut from budgets first there by deflating prices. ( and that’s a very long list of junk) However real goods necessary for living have been and will continue to inflate do to the fact demand is not dropping as much and the slowly decreasing value for the dollar will continue to make those items more expensive. So I think we will have both inflation and deflation. The wild card is many commodities come from outside of this country and as other nations begin working around the dollar for trade, Its value may begin to fall much faster than other currencies making all imported goods much more expensive. Further more food will soon be in short supply globally.
schlomo

The article is confusing price increases/decreases with inflation, which is defined as an increase in the money supply. Companies are cutting prices because they have to in order to sell their goods to a public with an ever decreasing amount of wealth. At the same time companies are decreasing the sizes of packaging/food contents to make up for the losses. A Haagen Daz 16 oz “pint” is now about 14 oz. Cans of Bumble Bee tuna fish now weigh an ounce less than they did a year ago. Hershey’s chocolate bars were 4.4 oz, now they are 4.2 oz. Cans of Chock full of Nuts coffee also shaved off weight. And on and on, many products’ contents have been cut by 5 or 10%. Regarding the Apple products: all technology prices are lowered when a product is produced by the tens of millions. When a product first comes out it’s priced to recoup the huge costs of research and new factory tooling. As millions of units are produced those costs can be depreciated over more units, and the price can be reduced. The first dvd players cost thousands, now they are $20. That doesn’t mean there is deflation.
- http://www.westcoastladybugs.com RUSS SMITH
  
  Hi!, Schlomo Et Al:
  
  Yes!, you are spot on. You maybe need to begin writing your own private news reports. Be careful though, because your logic may walk over many myth soothers’ impressions disregarding the facts. Someone said the other day that it’s OK for us to hold seperate opinions but not seperate facts? Thank you giving US some facts!!
  
  RISS SMITH, CALIFORNIA (One Of The Broke States)
  resmith@wcisp.com
hjb

great article in retail today its better to sell 100% of items priced 20% off or sit and watch the items grow old by obsolescence or age …if people dont like $10.98 for folgers you can buy walmart coffee for $6.98..if gas is too high get a half tank and fill it twice aweek less weight will save you mpg you walk into KOHLs and the place is empty no clerks to wait on you go next door and walmart is busy and every dept has a store clerk and their prices are a lot less ……the hell with the fed they don t affect me i deal in cash no credit cards, no debit cards no checks i have yet to lose a sale since i stopped taking them all you have to do is ignore them and if things get too bad default everybody is doing it we are adjusting to new rules we wont be going back to the old rules…they were changed to impoverish the poor people…if banks dont want to loan us money don t deposit any of yours
- paper is poverty
  
  If you use American dollars then the Fed affects you.
  
  I think you’re right, we’ll be going back to the old rules, using cash. I’ve personally seen a huge rise in under the table transactions (using cash) since 2007-8 or so.
Pingback: A Year of Deflation Coming Up? « Silver For The People – The Blog
http://- bob D

your top question is “Now the question is how governments will respond???”

depends on which govt you address ::

they are in two groups however, those with and those without leadership,

the ones with leadership will fast forward Nationalization of all entities starting with the biggest then next biggest, until they have control of these entities so they can expand employment by them until there is a normal mix of employees thus approaching full employment of those who can work,,,,,,

the funny stuff most leaders like to stick their noses into so as to occupy all their time on the job is ‘depression versus inflation’ which is the joke of this century….

where either or both are in control of the econ then you have what will not revert the econ to health,,,

the only way you can revert econ to helping is via full employment, of those who can and will work,

and a side solution is to get rid of welfare folks who dont want to work, why waste loot and resources on dead heads?

welfare ought be saved solely for such as new moms with new kids to raise so they should have the loot to devote self to raise the kids the right ways to benefit of that nation and the world,

but the folks who are able and that is most of them should be denied welfare, unemployment insurance payouts, etc, and leave them flounder until starving for food and thereby go to work for a buck to buy food, they are merely lazyasses…….

no matter how bad the econ, if a person wants to work for pay there is always a surplus of such work, the best paying of course are those that the individual creates himself, i.e. self employment, working for others never earns much more than room and board whereas self employed have the extra profits that buys them room and board and goodies…

along this vein, to lock up full employment via Nationalization requires an honest central bank, which no nation of today has, none ….

an honest central bank will enhance the nationalized full employment into a gravy train for the workers who thereby get room and board and goodies and chicken brunch every sunday

note that the worldwide consortium of central banks has destroyed the eurounion via loading them with debt and false promises and taking all their free money that could have given them chicken brunch every sunday etc etc and has usa on the ropes sliping into oblivion via the same centr bank mechanisms, i.e. overload of unpayoffable debt, plus politician leaders who are incompetent to op the nation, same worldwide….

it is not that the operators are bad folks, merely that they are thieves ….
- http://JoinAmericaAgain.com DM Zuniga
  
  I just LOVE that! Not bad folks, just thieves!! Priceless.
- Baghdad Bob
  
  @ bob D “no matter how bad the econ, if a person wants to work for pay there is always a surplus of such work, the best paying of course are those that the individual creates himself, i.e. self employment, working for others never earns much more than room and board whereas self employed have the extra profits that buys them room and board and goodies…”
  
  Not on my planet buddy. Here on Earth, small businesses and the self employed have been so regulated as to stifle the rewards due to those that are willing to take the risks involved in starting ones own company or firm.
  
  I’m an employed tradesman. Thanks to the socialist nanny state I’m due all the care and attention that this over regulation provides me. (Maximum work hours, minimum pay, minimum leave days, health and safety, etc…).
  
  My brother, also a tradesman, runs his own small firm. I see him stressed out, working dawn until dusk; six or seven days a week, paying taxes on payroll, ensuring local and federal regulations are adhered to, managing staff, invoices and cash flow, etc…At the end of the year, he earns roughly the same as me. Sometimes less.
  
  That’s just one example of millions.
  
  Until there’s a level playing field and Government gets the f@ck out of the economy, why the hell bother with all the hassle?
  
  It’s all part of the big plan. It’s not in the interests of Government to allow lots of small businesses to freely operate and exchange goods and services at the risk of not recording all financial transactions. The would me something akin to Freedom. They don’t want that. In short, they don’t want you, or me, using cash. They want everything digital; ergo – Taxable.
  
  Taxpayer = Consumer = Slave.
  
  They want us all working for GovCorp, Junkmart or McBurger. Everything monitored, everything regulated (Except the few execs of BigCorp).
  
  Welcome to Planet ‘Prison’ Earth. Enjoy your slavery, and don’t for get to Smile
http://- bob D

for those who are not players but wonder what will be happening need not look very far,

i.e. China (PRC) and Russia (USSR) have taken the time to make available their nations and resources each as a separate, yet interfaced, trade block,

thus the dead head nations such as the eurounion and usa ought dig self out of the pits by joining either by becoming a member of that trade block or merely authorized to trade within that block but without membership,

either way is life saving, expands markets to infinity, increases velocity of churn of loot from hand to hand to churn of loot bushel by bushel and otherwise hype up commerce to its ideal utopian state

the boss of USSR/Rus is of course Putin who was boss of east germany and then boss of KGB and now boss of USSR-Rus/KGB, and,

boss of PRC/China later this year is Xi Jinping, a talented guy who has already improved the lot of the chinese and their nation, has created, instituted and ops a domestic central bank to expand easily into a world central bank, all using chinese yuan as the world currency for all trades,

so too Putin-USSR-Rus as he evolves his trade block into its utopia…..

thus there is plenty of room to heal …
- Peter
  
  The Russians wouldn’t want them in their trade block, they’d corrupt the system and bring in new and undesirable dynamics.
God’s Right Hand Man

The I-Phone example of “falling prices” is a poor one! I recently purchased an I-Phone without a contract and paid $650 for it – a rip off, but one I was willing to accept. My point is that I-Phones are greatly overpriced and are a fad, so if Apple is to sell more, they may need to lower their excessive prices.

Deflation??? I don’t believe this can or will happen. I don’t believe that deflation is possible in a fiat money system. There can be asset deflation of an overpriced market, as in the housing bubble, but monetary deflation in an enviroment of print, print, print??? Hahaha. I do not believe that is possible. It’s more propaganda of the toilet paper printers!

http://www.comparestoreprices.co.uk/images/mo/money-toilet-roll–dollar-bill-toilet-paper.jpg
- Peter
  
  If you were willing to accept to pay that much for an I-Phone, you can’t call it a rip-off. You had a decision, one which you made. You ripped yourself off.
  
  But the rest of your premise is all correct. Deflation, is nothing but an excuse to justify money printing. But really, there is no deflation to be seen. There can be no deflation for long in any asset, unless it has come out of an inflationary bubble itself, like property.
Basey

I read in a Business Week article way back in 2007 an interview with Robert Rubin. I can remember nearly verbatim what he said because it made me so angry. “There is a financial crisis on the horizon which will overwhelm the Federal Reserve Bank. It will go on to overwhelm the various central banks around the world, showing once and for all the total interconnection of the world financial system. Thereby creating an opportunity to create one International Central Bank.”
Doug

High levels of debt are inherently deflationary because the money used to service that debt is not available for new purchases. The resulting fall in demand leads to lower prices.

The Federal Reserve’s printing of money is naturally inflationary because the federal government is able to consume goods and services without adding to the production of output.

It would appear that the fall in demand from debt servicing would be canceled out by the increased demand from government printing.

Imagine that this idea is taken to an extreme and 100% of people’s income is consumed by debt servicing (mortgages, student loans, car loans, credit card payments etc). In response, the federal reserve prints 100% of GDP and gives it to the government to spend.

This would result in fully funded pensions, healthcare, education, welfare, defense, and social security. The problem is that there would be nothing invested in the private sector for things like new farms, mines, factories, and software.

I think the long term result of the scheme will be the crowding out of private sector investment, as debt servicing sucks money away, and printing allows government to grow without the constraints of taxation.

Inflation will win the day due to falling output of the real productive economy.
- Peter
  
  True. But fully funded pensions would be meaningless, as inflation would have eroded the value of those pensions. Healthcare would have sky-rocketed and good luck getting your kid an education.
Chris

As Doug said, the fall in demand from debt servicing would be canceled out by the increased demand from government printing. So, we are aware that Fed had been buying bonds from the market which is effectively printing money. My analogy is that the Fed, instead of just printing money, buys the bond from the market so that the bond market will not collapse. There is always a buyer and the price can be supported or even set if required. This is purely speculative. The terms like QE or twist are just diversion from the tricks. For example, in the case of GFC, CDS is nothing but an insurance policy where anyone registered with the international swap and derivatives association, can buy insurance for CDOs. The person who buy the insurance need not even own the CDO. At the moment, the bond market is acting like the Hoover Dam, holding back a huge amount of money. The QE will increase the amount of money going into the economy. At some point in time, Fed will not know, inflation will suddenly increase. If inflation is being ignored at its initial stage, it will not be easily controlled when the momentum had built up. The only weapon to fight inflation is interest rate. Bond investors will flee the bond market, like water bursting out of the dam. This money will add to the inflation and it will become a viscious cycle. Interest rate had to be jack up quickly to contain inflation, then this is truly the end game. So if Ben wants to play with the inflation fire, he might burn the whole house down. It will be the final bondfire. Finally, the end result is deflation. So, Ben can have a controlled deflation now or an uncontrollable inflation that will result in a worse deflation.
- Peter
  
  No it wouldn’t. Not for the middle class. With money printing we should expect an increase in prices. Which would translate into an increase in wages, allowing people to have more cash available to service their debts. However, there is one flaw in your hypothesis and that is the fact that inflation stats are misrepresented, oh lets be honest, they’re a flat lie. Hedonic adjustments and reweightings of sizes of items in the basket. How ridiculous! I don’t know what they think they’re measuring, but it’s not inflation. Since inflation is absurdly low as far as reporting, people will not get those wage increases as one would expect with an increase in money printing, leading to increased inflation. So what really happens then is that things continue to get more expensive and peoples wages are not keeping up with inflation. It’s financial repression.
  
  Now, inflation will spiral and get much worse very quickly once the sleepy population catch on. And the FED buying bonds and price fixing, when inflation is spiralling, will cause what exactly do you think? More inflation, hyperinflation. And the statistics will not be able to hide it. Now, you forget, or haven’t been informed yet, that the elitist agenda is to take over the world a one world government. So when governments are on their knees and collapsing, because they can’t pay for anything, because their currencies are worthless, the bankers will step in with the hoardes of gold, offering to back a new world currency with their own agenda, their own government, which will be the United Nations. The economic collapse is planned and the point is everyone will accept their plan to end this mess. Ben does not pull the strings. People at Bilderberg tell them how things are going to go down. The FED vote, is just a show.
  - Chris
    
    Why would anyone wants to destroy his own country. Even the dictators in Burma know that if their people prosper, they will also prosper and their wealth will be multiplied many many times. Destroy the country and they cannot even enjoy their diminished wealth in comfort. US is the shining light on the hill for freedom and democracy. Extinguish that light and the world will go into darkness. I mean the world.
    - LK
      
      Yes, you are right about the US being a shining light. However that was extinguished long ago as people traded freedom for security. Have you not noticed the world is in a slow motion decent?
    - FractionalReserveGambling
      
      It’s not their country. That’s why they’re not concerned about the US getting destroyed. These people have tentacles and resources at their disposal that extend beyond the US. They are not adversely affected like a common citizen is, during a crisis like this and what is to come. The dictators in Burma have nothing on these people.
Jason Emery

The USA dollar is outperforming the Euro, therefore we must be in a deflationary cycle? Uh, I don’t think so. What do you say on a first date? You smell better than dog doo, lol?

The correct measuring stick is precious metals, also known as the ‘monetary metals’. And over the last decade, the dollar has lost the vast majority of its purchasing power. The sheeple are getting their pockets picked, and they are only vaguely aware of it. Don’t blame me, I voted for Ron Paul…………..
- Peter
  
  No. Do not mistake the US increasing in value against the Euro as deflationary. What was happening is that the Euro was inflating, becoming worth less. But back home in America, a dollar was still a dollar and prices were still increasing, in other words, people were still losing purchasing power.
  
  I also like Ron Paul. You guys need to start dragging politicians and bankers out onto the street to get some street justice, because there is no justice for you in the courts against them. They do as they please. You need to change that. Not through courts or the law, because it’s rigged against you.
- Tex
  
  A vote for Ron Paul was a vote for OBUMA…
BJS

When you go to the food market, do you see a 1lb of coffee or something different or should I say way less. ALL fisnished products are being made cheaply and provide less. You article does not add this into the scenario. Is your electric bill, college edu, insurance deflating? This article is so deceiving. If anything is deflating downward in value it’s the USD.
- Peter
  
  True… the value of the dollar is worth less, so people are demanding more money or changing their products by giving less in return, instead of raising prices in order to remain competitive.
Dan

If you are constipated do you stop eating? NO. You eat ruffage and get the system going again. Economics is a eco system that when one part stop participating, demand, it stops cycling wealth. If you want to get the system going it will take a reset of the worlds system, a modern debt jubilee, because the debt that can’t be paid worn’t be paid. And anybody who thinks differently doesn’t understand how bad the banks are in debt. They are on life support and at the same time strip mining all of the wealth out of the middle class, while they are making huge personnel wealth gains. Of course then again if your plan is to do away with the middle class, their wealth and political power, and install corporate feudalism, then the plan to do away with the social programs that benefit them and the poor, is the plan for you. And probably you’re in that class, so what does that say about you future?
- Peter
  
  If you’re constipated, you drink water fool. You can’t honestly comment on the economy if you can’t even get that right.
  - Peter
    
    Oh and in this case water, would be liquidity…. the reset comes later, which is deliberate. The bankers will offer up their huge gold holdings to back the new currency as they have successfully over the years, brainwashed everyone into thinking that gold is a barbarous relic.
Jason Carter

With 2013 coming into view, we see the stock market is ripe for another leg down similar in depth to 2008. Some believe we are following an enlarged megaphone pattern. Since one of the unspoken mandates of the Fed is to inflate the value of the stock market to create a wealth effect, we will likely see QE III once the stock market loses 15% or so. However, I believe there is a limit to their effectiveness.

I think we may see a year of declining velocity of money. As long as the Fed continues to support Wall Street, money will not come easy for the middle class. We will definitely see falling prices across the board in the coming recession (except in education as long as taxpayer backed student loans are given to anyone that wants one). Who cares if one says inflation or deflation? The M3 money supply may still continue to climb while the velocity of money will fall. If prices fall in 2013, it will more than be made up for by high commodity prices in 2015 and falling purchasing power.

There’s no doubt the Fed has set us on the Japanese path of low interest rates and currency debasement. Japan had the advantage of a robust global economy for much of their stagnation. The U.S. will be lucky to tap the bond market for a $1.3 trillion yearly deficit for five more years. After that, the game ends. Is the U.S. government capable of cutting $1.3 trillion from the budget by drastically reducing entitlements? Nope. Will the U.S. be forced into maximum austerity like Greece or will we be allowed to debase the dollar over the next 30 years to avoid defaulting directly on our entitlements? Hard to say but if the U.S. government tries austerity, there will be civil unrest and regime change. Maybe Martin Armstrong’s supercomputer can correctly model the nature and timing of future monetary and political events, but I cannot. I keep only enough money in the bank to pay bills and stack both Benjamins and silver eagles to hedge against an uncertain future.
- Peter
  
  I don’t think so… falling asset prices… which asset prices? Food, metals, property, stocks, agricultural… what? Why would asset prices fall? Because as long as there are no signs of inflation, they will continue to print money. Eventually, inflation will show up and visciously, almost overnight! And once the mentality of inflation catches fire, prices rise even faster and prices start spiking! People panic and buy large amounts of food, fearing that tommorow, it will be twice the price. So everyone buys 10 loaves of bread, and guess what, there’s nothing left on the shelves, no food. Doesn’t matter how much money you have in your pockets. People que for the next batch or delivery and attack the truck driver to get loaves of bread because they can’t afford the bread!
  
  So there will be no deflation, the officials are too stupid to allow it. The end game is to crash the system. And printing money is a sure fire way to do that, faster and quicker… than a languishing period of lower prices, no growth, stagnation… it never ends. At least with money printing and end is reached sooner with the introduction of a new currency, backed by the only viable option… gold.
JWRebel

There is some very basic confusion in this discussion. First off, there cannot be too much debt, because debts are also savings. If all the debt and all the assets were evenly distributed, we could just net it out and nobody would be the poorer. Asset income is also balanced by debt servicing, so that evens out too. The problem is not too much debt, but the fact that assets and liabilities are distributed so unevenly. So unevenly, in fact, that the debt cannot even be serviced and ever more collateral passes into the hands of the creditors, ensuring that assets will yield even less revenue. In Monopoly, this is the point at which you start a new game.

And as far as the bond market expectations of price inflation goes: Who buys bonds? Consumers? No, central banks, commercial banks, insurance companies and pension funds. Do you think they are thinking about the price of milk and groceries? No. They think only in terms of assets. They know bond prices are supported by the Fed and the government. As long as the government manipulates interest rates, they are assured of capital preservation or even appreciation and nominal returns (and keeping their job). Do you think pension funds will hesitate to buy bonds until they get a better return? Of course not, there is record demand. They will not store gold or milk in the closet instead of buying bonds. Do you think the Chinese will stop selling things to the American and European markets and keep the stuff themselves, so they do not have to buy bonds, or start stuffing trillions of foreign currency reserves in billions of mattresses? Will the Arabs stop recycling petro-dollars and keep the oil in the ground? Purchasers of bonds are not guaging inflation. They are assessing the risk and rewards of holding competing assets, trying to match their liabilities down the curve to assets.

The problem isn’t that prices will go up (they will for commodities relative to assets). The problem is that the economy will wither away as all assets are concentrated into the hands of those who do not need asset income to meet their liabilities. The quantity of money does not really matter for that process, except for the timing and who succumbs earlier or later. Only totally restructuring the (asset) economy can prevent this logic from taking its course.
- Jason Carter
  
  And what is it that ultimately causes this uneven distribution of wealth? It’s the fractional reserve banking system.
  
  As debt load as a % of GDP exceeds 90%, future growth is reduced by about 1%. Amortized over a few decades, that is a very large decrease in the standard of living.
- Agent P
  
  MMT…?
- Peter
  
  Doesn’t make too much sense… I think your economic logic is wrong and you come to no meaningful conclusion.
  First off, debt is not savings. They’re two completely different things. They can only be savings when the thing that you purchased the debt with, is increasing in value, faster than your yearly interest payments.
  
  Secondly, netting out assets…that’s never going to happen, since the elite own 80% of the assets. The 2%. You think they’re going to net out their assets in a charitable gesture to you? or me? You must be mad! So your premise starts off on two ill conceived notions. I need not bother about the rest.
Bigelow

“Anyone who thinks there will be a willing return to the gold standard just does not understand government. Why give up power as long as you have it? The real trend is toward the elimination of cash and thus government will then be able to collect every penny it desires in taxes. The object is a cashless society. Gold is not the hedge against “inflation” it is the cornerstone of wealth. The common denominator in the “real world” free of political manipulation. This is why governments are now clamping down on the cash gold trade. We are headed into the end of cash and that means the end of anonymity. Government will keep tabs on everything you do. They decide to spend whatever, then they demand you fund it. They have destroyed international trade. An American small businessman can no longer build a company overseas for no bank will deal with an American. And we are trying to create job? The economy is starting to spiral down as the thirst for taxes destroys everything – include cash.”
http://armstrongeconomics.com/2012/09/10/end-of-cash/
- Peter
  
  That wouldn’t work either, because you could create cash out of thin air and therefore paperless money, would become meaningless. How would you stop authorities from creating money from nothing? You couldn’t and there is no viable mechanism to do that, except to revalue the price of gold to like $58,000 per ounce, but in the new currency too. Why would people trust money that they couldn’t see, knowing that somebody else could print money, driving up prices and stealing their lifestyle or living standard from them. It’s not going to happen. The fact that gold had become a barbarous relic, was brainwashing to get gold from the masses and from governments. The bankers have all the US gold. It’s not government. The FED doesn’t have the gold in Fort Nox. It’s gone.
  The illuminati have it. They scammed everyone out of their gold all these years. But the Russians and the Chinese were smart enough to think all this through to it’s logical end. You my friend, need a rethink.
  - paper is poverty
    
    But the vast majority of transactions and the vast majority of the money supply are merely 0′s and 1′s already — and we all do use this paperless cash. I am reminded how infrequently I use real cash every time I need $3 for a library fine and realize I haven’t looked in the billfold of my wallet in days. And they do create new paperless cash, overtly and covertly, and in huge quantities. So we are already doing what you’re saying would never work.
    
    You might argue that the paperless cash is still redeemable in physical cash (for whatever that’s worth — it’s just cotton and linen). I.e. one can still use physical cash if one wants to. But that’s not quite true either. You can’t just go to the bank and expect to take out $20,000, as they might very well not have it or they might simply refuse you. And if you drive home with that much money in your car you better hope you don’t get pulled over by the police. In Europe large cash transactions are simply banned in some countries. In the US large cash withdrawals and transactions generate reports to government. You also face penalties for not using a credit card in various areas (rentals & hotels being obvious ones).
    
    I think it’s true that we have been heading for a paperless cash society, but I do think that’s likely to reverse as people rely more on local exchanges (think Craigslist and farmer’s markets) and as people turn to under the table business in order to make ends meet. It will be to avoid taxes that people return to physical cash, not because people fear the unlimited printing press (though they ought to).
    
    Anyway, the Germans used physical marks in the 1920s, and fat lot of good that did them.
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Peter

Well…you paint the view of the economy now as it is and then you say how they plan to fix it, but by having them believe that it’s the only thing, which isn’t true. There are other options, but none of them viable or without their own troubles. To not print money, will be to see prices go down as businesses start to cut jobs and charge less for their goods and services, because business, has been slow. Because everyone’s indebted. So if you don’t print money and you don’t not print money, what other options are there? Well, neither one of them is viable, not for the long term anyway. The system will have to come to a crash for something else to take it’s place. We may print money and I think we will, because it’s the best, not so good plan. The lesser of the evils. But something will have to come, something will have to take it’s place. Why? Because people would have lost faith in the currency, like Zimbabwe. The only difference is, Zimbabwe didn’t lie about it’s inflation numbers. It actually recorded them. Because inflation, besides the money printing, then becomes a psychological phenomena, where the fear and vsiciousness of itself, feeds on itself. And it spirals worse and worse. Which is why government lies about the inflation number by reweighting intems in the basket ever so often. But even that can’t hide the fact of the higher prices on the street. Sooner or later, people are going to wake up and realise that inflation is probably over 10%. But when it gets too 100% and the official figures are still showing 5%, then you will know that the game is up. That gold will be flying! People will be revolting outside your windows wanting to drag you out into the streets to burn burn you. People’s lives will be fucked. Businesses and banks will be shut down, unable to operate in this environment. People will have no money. Those who had physical gold, can buy things. Your money, that you do have, your Dollar notes, will be worthless. You’d have to pay $1,000,000 for a loaf of bread. But gold, gold will be worth a truck load of cash by comparison, because gold would have maintained it’s value and purchasing power. And the mania in trying to get ones hands on some gold coins, or making money off of the gold price, will be feverish! Stocks will rise initially, but the businesses themselves, would collapse! The stock markets will eventually close. Bankers, who have been stealing the US FEDS gold reserves over all these years, through leasing contracts and suppressed prices directly by the FED itself… These bankers will offer up all that gold that they now hold, up for as a backing to a new world currency. Of course because they hold all the gold, there are deals to be made. And why gold? Well because look, everyone’s fighting for it, they believe in it’s value and worth, what better else to back the currency with? They then get control over the printing and money presses and then eventually institute electronic banking, no cash, just electronics. They’ll then set off the CIA to steal bank cards and do bank frauds and large amounts, in order to convince the population to take RFID tags, with our banking info on it. And look, your dogs have been wearing it all these years. So people accept it after, later they introduce bugging devices into the chips, which get released into your system, little nannobots, which report back to their computers, through those boxes that they’re installing outside your homes, without your permission…. Anyway… that’s where you’re headed. So, best thing to do? Buy gold! Own it, keep it and you’ll be able to convert it to the new currency when it’s introduced and backed by gold, gold will be worth a lot then, who knows, you may be able to buy a whole new lifestyle with just a handful of gold coins. The currency has to crash, one way or the other, money will flow to a safe haven, like gold, simply because there’s no viable, alternative. Gold is exchangeable for anything! Unlike wheat, corn or oil. You can’t carry that shit around. Gold you can! So, there’s been a mass brain washing that gold is bad, that it’s a barberous relic. But that was only to con everyone out of their gold at low, low prices. And while the illuminati have instructed the FED to lease gold to the bullion banks, the bullion banks have no intention of paying it back. Gold has been hoarded. When this scam is discovered, they will collapse the economy into chaos, civil war, riots… no police, the army moves in. People are shot and killed. Now nobody cares about the stolen gold, which the bankers have. But the bankers then step forwards and offer their gold as collateral or backing for a new monetary system at a point where governments have collapsed and no longer serving the people. Governments disintegrate under the pressure and a new world government is instituted, run by the bankers, you knew how the whole show was running from beginning too end, which started hundreds of years ago, by their fathers and great grand fathers and their fathers. They new back then, how they were going to shape the economy, their plans passed down from generation to the next. Well, I hope they’re having fun. Because I know I would.
robert keith

Mr. Rubino, what is your gut telling you?
Willy1964

- Opening the monetary floodgates won’t help in a Deflation.
- Interest rates will soar, not because of fear of inflation but as a result of fear for a Default. (Greece anyone ?).
- What the inflationistas don’t understand is that “printing money” only will increase the deflationary bust.

Never read the Robert Prechter’s book “Conquer the Crash” ?