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Deflation or Inflation? When Will the Price of Gold Plummet?
09-30-2011, 10:13 AM,
#61
RE: Deflation or Inflation? When Will the Price of Gold Plummet?
When the banks call in loans, that's called a contraction, has not much to do with deflation. Inflation and deflation are a function of how much money is being generated. It doesn't matter if it 'trickles down' or being loaned out. It's still inflation.
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09-30-2011, 11:55 AM,
#62
RE: Deflation or Inflation? When Will the Price of Gold Plummet?
May as well define it outright:


CONTRACTION
Quote:A period of general economic decline. Contractions are often part of a business cycle, coming after an expansionary phase and before a recession. A contraction is a period of economic decline marked by falling real GDP

A phase of the business cycle in which the economy as a whole is in decline. More specifically, contraction occurs after the business cycle peaks, but before it becomes a trough. According to most economists, a contraction is said to occur when a country's real GDP has declined for two or more consecutive quarters.

For most people, a contraction in the economy can be source of economic hardship; as the economy plunges into a contraction, people start losing their jobs. While no economic contraction lasts forever, it is very difficult to assess just how long a downtrend will continue before it reverses because history has shown that a contraction can last for many years (such as during the Great Depression).

So based on that we look to Real GDP:

Quote:Real gross national product -- the goods and services produced by the labor and property
supplied by U.S. residents -- increased 2.2 percent in the second quarter, compared with an increase of
1.5 percent in the first. GNP includes, and GDP excludes, net receipts of income from the rest of the
world, which increased $28.0 billion in the second quarter after increasing $36.6 billion in the first; in
the second quarter, receipts increased $39.4 billion, and payments increased $11.4 billion.
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_3rd.pdf (page 3)

So with those number we're not in contraction officially according to BEA estimates. Although we were recently (see grey area on chart).

DEFLATION

Quote:A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. opposite of inflation.

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.

Deflationary periods can be both short or long, relatively speaking. Japan, for example, had a period of deflation lasting decades starting in the early 1990's. The Japanese government lowered interest rates to try and stimulate inflation, to no avail. Zero interest rate policy was ended in July of 2006.

So the Fed is counteracting deflation with a general increase in money supply. Interest rates can't go lower than they are. Domestically the CPI even dropped recently (2009).

Quote:The Labor Department’s consumer price index decreased 0.1 percent in March from February, while in the 12 months ended in March, prices fell 0.4 percent, the first decline since 1955.
http://www.guardian.co.uk/business/2009/apr/15/us-economy-deflation-recession
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ataCusiQuH9U&refer=home

Money supply and credit are also on the decline. Wages are down. The money has gone to reserves not the economy so, by definition we have deflation.

Now to the future hyperinflation is possible if the banks start lending from their war chests, government spending remains high (and doesn't just go to bank reserves and debt payments) and/or China floods the world with US dollars.

There are enough dollars out there but they are not liquid.. yet.

Then we have a world of domestic economy vs a world economy a lot of those dollars are outside of the US, relative buying power is distorted due to USD vs other currencies so prices (CPI) can go up despite deflation due to reliance on imports.

Here's an article predicting an inevitable Deflationary Contraction, not all of which I agree with, but it makes a point:

Quote:The Coming Deflationary Contraction
May 22, 2011
By Peter Raymond

Determining when the next great liquidation will occur is impossible to predict with any degree of certainty; nevertheless it is fair to say the sooner the better. Economic liquidation is a restorative process that corrects the harm done by inflationary policies. If accepting of this premise, then liquidations or deflationary depressions cannot be considered the disease in need of cure which unfortunately has been the position of economic interventionists since the early 1920's.

Instead, they are a necessary and unavoidable adjustment after years of excessive credit expansions have destabilized the economy. Efforts to further delay these self-corrections by instituting a series of escalating inflationary policies only needlessly extends and deepens economic woes and increases the size and scope of the inevitable adjustment. With the increasingly aggressive actions of the world's central banks and governments over the last decade to inflate the monetary supply, it seems a safe bet the next liquidation phase, when it does finally take place, will be a very large and abrupt correction.

Already, the ominous signs of economic stress caused by historic intervention measures are becoming evident. Despite the extraordinary monetary and fiscal policies to ward off deflationary pressures and economic contraction, prices are once again signaling that certain sectors of the economy would quickly liquidate if the stabilization programs in place were lifted. Home and auto prices for example have been pushing through a series of price support schemes and headed to lower levels in spite of a rapidly depreciating dollar. Also, the recent increase in volatility in both the commodity and currency markets is suggestive of price distortions generated by the Federal Reserve's ongoing quantitative easing programs.

The combined initiatives of policymakers and central bankers to suspend economic forces to create the impression of a recovery and price stability can go on for only so long before the building wave of deflation can no longer be contained. Not even the most ambitious plans to flood the economy with easy money can prevent the eventual contraction of the economy and a general fall in prices. It has been tried before and it does not work. There is of course a cost for such heavy-handed intervention. The longer and more aggressively a market correction is delayed by predictably ad hoc measures of panicking policymakers, the greater the size and duration of the liquidation.

Perhaps most concerning is the continued arrogance of the present day interventionists. They are never in want of self-confidence or devotion to their policies. Unfortunately, their conventional wisdom continues to justify radical inflationary measures as a means to indefinitely hold off a liquidation cycle and miraculously jumpstart another period of economic expansion. Nearly four years after the first indications of looming economic trouble appeared in the second half of 2007, these tinkering central planners now seem willing to sacrifice the dollar in order to defeat the deflationary pressures their previous inflationary policies fostered in the first place. Needless to say, it will be utterly demoralizing to witness the expected ramp up of desperate actions by these frustrated interventionists utterly dumbfounded by their repeated failures to stimulate economic growth. Of course, they will never acknowledge their actions prolonged and aggravated economic decline.

So what happens when the liquidation process of a depression begins in spite of the slew of much touted countermeasures that are soon followed by heated accusations of interventionists looking to assign fault to hapless scapegoats? It entails a dramatic fall in prices and production of nearly every non-essential good and service until price and production reach levels supported by market conditions. Wages, durables, equities, and real estate will plunge at an alarming rate. Labor unions and major industrialists will unsuccessfully try to shield themselves from deflation and job losses by demanding the government implement price and production controls. But government can do nothing long term to bolster artificially high price levels and will only further decimate the economy by trying. In fact, stabilization efforts during a liquidation period often cause prices to sink far below where they would otherwise have been under a passive policy. Sadly, unemployment does spike, especially in high order industries until wages adjust much lower. This is truly an unpleasant affair, but completely necessary and usually short lived.

Although it is counterintuitive and obviously controversial, it is imperative to allow the monetary supply to contract and interest rates to rise while simultaneously reducing public spending. Without such action or, in many instances, inaction, the economy will only be further disrupted and recovery delayed. Even something as innocuous and seemingly compassionate as extending unemployment income has the unintended consequence of delaying reemployment and economic recovery. It is interesting to note that prior to the New Deal, private charitable organizations strongly opposed government funding of humanitarian efforts including unemployment income. They correctly argued charity was best left in the private sector.

Such austerity and money tightening measures employ exactly the opposite philosophy cooked up by Secretary of Commerce Herbert Hoover, and later expanded upon while president, to "counter attack" depressions and supposedly avert economic ruin. Amazingly, Hoover's basic premise that government action is the "better option" has not lost any of its appeal to this day.

By the way, do not believe the revisionists' false portrayal of Hoover as ever favoring a laissez faire approach with the economy before or during the depression. Hoover was an enthusiastic central planner who frequently boasted of his intervention successes in 1931 when it was thought government stopped the depression with its numerous command and control programs. And records prove the Federal Reserve was pouring cash into the reserves of national banks trying in vain to expand credit. The shrinking of bank reserves was the result of a justifiable loss of faith in the banking industry leading to abnormally high demand for physical possession of legal tender.

To his credit, Hoover ignored the rather stunning proposals put forth by leading industrialists and labor leaders to institute full blown national planning, much of which was supposed to emulate the then en vogue Soviet model. Many of their ideas would emerge later under the disastrous New Deal policies of the FDR administration. Had he complied with their requests, Hoover would have joined the ranks of other prominent Marxist leaders of that period and not just another failed interventionist who spent the remainder of his life vigorously defending his actions to the very end.

Some unexpected developments can occur as a result of liquidation, barring any massive government intervention. First, there is normally a strengthening of the currency as the monetary base contracts. So in our case, the dollar's current downward trajectory would conceivably reverse course, causing the price of dollar-based commodities to fall as a result. Surprisingly, gold and silver prices fall as well in response to rising interest rates on savings and the strengthening currency. There recent selling of gold holdings by George Soros and other large hedge funds may presage a reversal of gold prices and dollar valuation. Second, falling wages do not automatically translate into a loss of purchasing power. This is because the drop in prices for most goods and services will normally outpace wages declines. Those lucky enough to remain employed throughout a depression will enjoy an increase in purchasing power even when adjusting for wage reductions. This phenomenon is just the opposite of what occurs in an inflationary environment where wage earners experience an erosion of purchasing power over time. Allowed to run its course, liquidation is very rapid and the majority of unemployed return to work in less than a year, albeit at much lower wages and mercifully without much change to the average standard of living.

It is the affluent investors that bear both the immediate and long term brunt of the losses since the price of equities, hard assets, and real estate collapse and remain suppressed for quite some time. This outcome seems rather fitting since the wealthy are the primary beneficiaries and supporters of inflationary policies.

The all-important point is that the disruptive oscillations of the economy are the unfortunate consequence of interventionism and inflationary monetary policies generating boom and bust cycles. The policymakers and central bankers deserve the total blame for these swings of the entire economy and not speculators, consumers, or producers. These cycles are certainly not attributable to some ludicrous theory citing mysterious shifts in overall consumption causing over or under consumption. Until such time government is prevented from manipulating the economy and the monetary supply, inflationary expansions followed by deflationary contractions, along with the misery they produce, will be a permanent and inescapable part of our future.

Admittedly, nearly a century of indoctrination has created the expectation and confidence governments can and must take action in every economic crisis. It would be politically untenable for all but the staunchest non-interventionists to maintain a passive stance during a depression. By far the majority of policymakers succumb to the demands of hard pressed constituents, even if it is known such actions would ultimately hurt the people they are meant to assist.

This brings me to the recent remarks made by the economist Joseph Stiglitz where he declared austerity measures are essentially a failed "experiment that has been tried before" which destroys jobs and undermines economic recovery. Naturally, the first question that comes to mind is: Where and when have austerity measures been proven to be ineffective in dealing with economic contractions? During the last depression, government actions incorporating most of Stiglitz's preferred spending policies yielded an unmitigated humanitarian disaster that dragged on for nearly a decade. Surely, it would seem unreasonable for Stiglitz to consider the New Deal "experiment" as even remotely effective in ending or even shortening the depression, let alone creating or saving jobs. Then again, nothing about the public intellectuals from the left shocks me anymore.

The conspicuous flaw with the interventionist logic is the fundamental belief wealth is created by consumption; the more that is consumed, the greater the wealth creation. Therefore, economic interventionism is centered on maintaining wage and price levels in order to maintain a targeted rate of consumption. In reality, it is production that creates wealth. And the wealth created by production is what results in greater consumption. Interventionists have the cart before the horse.

It is this nonsensical reversal in the order of wealth creation that leads to the erroneous conclusion that net prosperity is increased by more evenly redistributing wealth and expanding public spending. Since both are thought to increase overall consumption, interventionists reason the national prosperity will grow as a result of their economic and social engineering schemes. Interventionists are so beholden to the idea of wealth being created by consumption that they have derived out of thin air a formula to calculate how much government "investments" will grow the GNP. Somehow a dollar confiscated from the private sector through taxation magically produces more than a dollar in economic activity when spent by government.

In practice, such government spending sprees have a highly corrosive effect on the economy and employment by removing much-needed funds normally set aside for productive purposes, and instead using them for consumption. Since government, by and large, is a massive consumer of goods and services that uses the funds taken from the private sector, it contributes relatively little to production or investment no matter the level of spending.

The idea that government spending acts as an additional factor in the economy, and thus a productive investment, most likely comes from its odd inclusion in the GNP numbers. This undoubtedly obscures the negative impact public spending has on economic growth and prosperity. That fact that GNP was first introduced in 1934 in the midst of the New Deal era should arouse the suspicion of critical thinkers, however.

Because government spending is largely representative of consumption and not production, the coerced private sector contributions funding public spending is in fact a burden on the private sector that actually reduces overall production and wealth creation. This is why during any economic downturn it is best to reduce and not increase government spending in order to lessen the drain on private sector capital. Otherwise, there is less private capital available to invest in production and aid in the recovery process. Advocates of consumption-oriented economic policies are unwilling to accept that no manner or amount of government spending, whether or not it is referred to as an investment, can duplicate let alone outperform the positive return of voluntary private sector investment in production.

The overriding issue that will complicate our economic recovery is the massive national debt. A drop in tax revenues and any increase in the value of the dollar that normally accompanies a liquidation cycle will push the nation closer to insolvency as the economy works its way through monetary excesses. Also, the interest on the national debt will become an inescapable and growing drag on the private sector as interest rates rise from historic lows. These are the unfortunate consequences of a fiscally reckless government continuously accruing debt for over a generation. There is little doubt the Federal Reserve will continue their crusade to depreciate the dollar in order to facilitate deficit spending and lower the cost burden of the national debt. However, these inflationary efforts will likely fail to hold off a deflationary contraction for much longer.

Contrary to the predictions for the complete ruination of the dollar, I anticipate quite the opposite. In the near term, inflationary pressures will certainly continue to build and may surge for a short time, just before a sudden reversal occurs marking the beginning of a liquidation cycle and rapid deflation. Strange as it may sound, I believe the onset of a deflationary depression offers the best hope of salvaging the dollar and ending the reign of the inflationists. Growing public awareness** and displeasure over the harm done by inflationary policies and runaway government spending may leave no option available to policymakers other than returning to the gold standard thereby forcing fiscal and monetary restraint.
http://www.americanthinker.com/2011/05/the_coming_deflationary_contra.html

**Or is it public manipulation to enslave them with a premium debt? The best play for the banks, as previously stated, especially with their reserves in place now, is to raise interest rates and capitalize on the amount outstanding. No better way to do that than deflation increasing the buying power of their assets which is held in USD. That leaves overdrawn consumers, states and governments holding the bag in this shell game.

Default is the best option, let the banks absorb a good share of it.
There are no others, there is only us.
http://FastTadpole.com/
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10-01-2011, 10:21 AM, (This post was last modified: 10-01-2011, 12:07 PM by Hans Olo.)
#63
RE: Deflation or Inflation? When Will the Price of Gold Plummet?
Quote:Deflation: A decline in general price levels, often caused by a reduction in the supply of money or credit.

That's a very common, but false definition. Deflation is not caused by a reduction in the supply of money - it IS the reduction. Think about it: when the money supply contracts, prices don't have to go down. They could stay the same when they normally should go up.

Same goes for inflation. Inflation does not mean prices go up. It could mean prices stay the same while they SHOULD be going down.
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10-03-2011, 03:18 AM,
#64
RE: Deflation or Inflation? When Will the Price of Gold Plummet?
Quote:That's a very common, but false definition.

I have thought about it, at length. I was going with the most common definition. Price inflation according to the CPI is happening and not happening depending on which sectors you look at and we could split hairs over that.

Oil and housing markets are manipulated, so is the stock market, money itself is. I'm trying to get through that and go with buying power of the average public citizen, which is where it hits home. But is that based on the dollar or average income? And is that income before or after taxes? How does the debt factor into the equation? Does it matter where the government dollars go? Are we taking averages across the board, mean or mode, what of foreign holdings?

We can agree there is are two economic cycles as I posted above but maybe we should simplify it a bit? But in doing so does this put blinders on the big picture?

Maybe we should pick something specific like is the dollar a good investment, then establish a term of scope to set a timespan?

Guess we'll have to come up with some common ground to define what deflation is, and yes it does get distorted, depending on who you talk to.

The point of this thread for me was to get through all that subterfuge, to follow US money, where it goes and what it can buy - gold included.
There are no others, there is only us.
http://FastTadpole.com/
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10-04-2011, 07:05 AM, (This post was last modified: 10-04-2011, 07:29 AM by Hans Olo.)
#65
RE: Deflation or Inflation? When Will the Price of Gold Plummet?
Just one more thing: Threre are price INCREASES according to CPI. Prices don't inflate, prices rise.

The CPI is also not a good measurement of how well the economy is doing, and even if it was in theory, the government cooks the books and always makes it look bigger than it really is. Every year they correct the numbers downwards because they were overly optimistic in the past.

I sugest we define inflation as growth of the money supply. Growth of money supply can lead to 'price increases', but also 'slower price decreases'. Take mobile phones for example. Prices don't increase there, but you could argue that prices would fall much more quickly if the money supply wasn't inflated.

Is the dollar a good investment? No, the dollar is not a good investment at all. An investment is supposed to give you a return over time. While the value of the dollar diminishes over time, you lose purchasing power.

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10-13-2011, 10:17 PM,
#66
RE: Deflation or Inflation? When Will the Price of Gold Plummet?
Going more into the excess reserves that have been piling up with the bailout combined with the low low low interest rate I found this insightful article.

Quote:Chart of the Day: Excess Reserves
Edward Harrison
6 April 2011 10:00

[Image: Excess-reserves.png]

Since the financial crisis hit in 2008, excess reserves have piled up in the U.S. financial system. There were almost no excess reserves in the system during the period of recorded data from 1959 onwards. But after the post-Lehman Brothers panic and the Fed's zero interest rate policy, reserves piled up.

[Image: Excess-reserves-2.png]

[Image: Fed-Funds-rate.png]

The build up of excess reserves has coincided with a steep fall in the money multiplier.

In a fiat money system, there is not a very good correlation between base money and M1 and credit because reserves don't create loans. In practice, the lending operations of commercial banks have no interaction with reserve operations. Lenders simply take applications from customers who seek loans and assess creditworthiness and lend accordingly.

In approving a loan, banks instantly create a deposit, a zero net financial asset transaction – and this happens entirely independently of the reserve requirement. In Australia, Canada, Sweden and New Zealand there are no bank reserve requirements. In periods when credit is expanding, if a banking system is at the reserve requirement limit, the central bank can either:

* create new reserves;
* relax the reserve ratio; or
* refuse to create new reserves and cause a credit crunch

In practice, central banks have opted to create new reserves, which is accomplished by buying financial assets with newly created money (in the form of electronic credits on bank balance sheets).

Right now, credit growth is anaemic because of either a lack of demand by creditworthy borrowers or a fear of capital constraints at lenders. Anecdotally, both issues seem to be at play. That has meant that the Fed's injection of reserves into the system has led to a pile up of excess reserves instead of new lending.

I have been saying QE2 will end as planned and that the Fed will pause to assess the economy before doing anything else. Based on Federal Reserve messaging, QE2 does look to be winding down on schedule. If economic growth in the U.S. does not falter in the second half of 2011, the Fed will look to drain excess reserves from the system as preparation for an interest rate hike at some unforeseeable future date.
http://www.creditwritedowns.com/2011/04/chart-of-the-day-excess-reserves-2.html

Another good article from 2008 in reaction to the bank bailout at the same site when excess reserves were at $300 Million. As of 2006 the required reserve ratio in the United States was 10% on transaction deposits and zero on time deposits and all other deposits.

Quote:[Image: excresns_max_630_378.png]

This is a chart of the excess reserves held at the U.S. central bank. The chart, compiled by the St. Luis Fed demonstrates that banks always lend out nearly every dime they can so as to make a profit. They do not hold excess reserves at the Fed, sitting around making them no money.

But, notice how the blue line is flat near zero and then it spikes up to ridiculous levels close to $300 billion in 2008. With our reserve ratio of 10%, that's nearly $3 trillion of lending that isn't being done.Banks are scared out of their minds and are holding a huge amount of excess reserves...just in case -- profits be damned.

This chart demonstrates that banks are not lending. This chart explains why the money multiplier is contracting. This chart explains why we have a credit crisis. This chart explains why the Fed is pushing on a string. This chart explains why deflation is a threat.
http://www.creditwritedowns.com/2008/12/chart-of-the-day-excess-reserves.html

So we're looking at a lever held by banks, not the fed per say, to either hold or lend. Interest rates can't go any lower so the scenario would be that when they rise lending will happen but consumer and business debt is at saturation so there could be massive credit defaults and banks may not be willing to take that risk.

A change in credit default laws could loosen the purse strings and create an environment for inflation but as long as the banks are not lending we're seeing deflation. If they lend now and there are defaults we see money disappear so we'll see inflation followed by deflation.
There are no others, there is only us.
http://FastTadpole.com/
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03-08-2012, 09:46 AM,
#67
RE: Deflation or Inflation? When Will the Price of Gold Plummet?
Answering the Gold Scam and the Great Hyperinflation Hoax



http://www.youtube.com/watch?v=Ha-3xYcu5Yw
There are no others, there is only us.
http://FastTadpole.com/
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