patrick.net

They are "printing" as fast and as much as they possibly can right now. Money supply is through the roof in the past 2 months. However there isn't much (or any) traction. Debt destruction is also much greater. Deleveraging is just beginning and every action they've taken so far has only succeeded in slowing it down.

It's not until the de-leveraging is near complete that things can tilt to an inflationary slant.

I'm not saying it can't be two years. I find that unlikely though. Japan fought against deflation for over a decade and they were a much stronger country (economically speaking) going in than we are today.

Japan faces deflation again in the near future...

http://www.iht.com/articles/2008/11/25/business/yen.php

"Japan is facing the biggest threat of deflation among industrialized nations next year, the Organization for Economic Cooperation and Development predicted Tuesday, warning that the global financial crisis could further damage an economy already in recession."

No, the problem is not because they are not printing fast enough, it is because they are not printing at the right place, and it seems like they are getting message.

They cannot print at the top of the pyramid. They have to print at the bottom. Sending rebate checks, buying down the mortgage rate, they are moving in the right direction.

If the Fed can (not that I think it can do so without causing collapse of the USD right away) buy down the mortgage rate to 1%, we are back to 2003 right away, and deleveraging will stop.

It has to be a combination of rebate checks, government projects, and entitlement programs that are ONLY paid in coupons that expire within a short period of time. It will be more powerful if they can buy down the mortgage rate, if not, the above combination will work much more effectively than the alphabet soup lending programs.

I meant to say "credit destruction" rather than "debt destruction" above but both apply.

deflation,

Japan had savings, trading surplus, budgetary surplus and the government was NOT in debt in 1990, it was in fact the world's largest creditor. We are exactly the OPPOSITE of everything that Japan was in 1990.

We don't have two years. We may even collapse within 12 months. we just committed $800B this week, on top of the $500B deficit we have for FY2009. Who the hell is going to give us $1.3T?

OO, I think there is a flaw to your 1% thinking. That would work to fix prices in place today. However, unless the government guaranteed that 1% interest rate forever, eventually the rate would rise, putting downwards pressure on home prices. They can prolong the painkillers, but they can't cure the disease.

deflation: I read the Michael Lewis article yesterday. Completely awesome. It's pretty apparent how unskilled many financial industry "insiders" truly are, and how much their irrational behavior can push the system out of equilibrium.

It also underscores how badly some people need to go to jail, or at least face public censure over their absolutely outrageous incompetence.

Brand,

of course not. I am just saying this will extend the pain to the next admin. It will buy us time. If they can buy down to 1%, they will have to keep 1% indefinitely until the total collapse.

But nevertheless, we have a finite lifetime. So we must assess what is most likely to happen during the time frame in which we are alive, or more precisely, we are productive, and position accordingly. You know the government is going to screw with your life, so you might as well figure out what it is going to do and align yourself with what big brother wants to do.

OO: Look, the only thing that can generate 1.21 gigawatts of electricity is a bolt of lightning!

:o

Actually, if we could postpone the consequences until after Generation X/Y is dead and gone, that would be awesome.

ONE POINT TWENTY-ONE GIGGAWATTS???

GREAT SCOTT!

Giving away money to pay down debt is not inflationary. It simply eliminates debt and decreases leverage. It also doesn't create jobs, and doesn't encourage people to borrow or banks to lend.

They can bring mortgage rates down to zero as they did in Japan. It had no effect there and will have no effect here because credit worthy people are unwilling to borrow and banks are unwilling to lend to the others.

The government would have us believe that real estate is worth what is being asked today, but few people are buying that fable nowadays and fewer people will going forward.

A dollar collapse would mean losing world dominance and is something they will actively try to avoid.

The dollar will not collapse any time soon. Currently, the rest of the world has worse problems than we and that is causing everyone to flee to the currency they see as most stable, the USD.

deflation,

wake up, who is going to buy the $1.3T debt? Nobody combined has that kind of money. Please refer to the Fed's Treasury holding by country, and tell me which countries combined can buy that much debt. Remember, China, Middle East are all NOT raking in that much USD any more under deflation.
http://www.treas.gov/tic/mfh.txt

Please, give me your estimation of which countries combined can buy that $1.3T (hint: what they add cannot exceed their entire foreign reserve), please specify and be exact. The current collective holdings of all countries in US Treasury is $1.8T, which is cumulative holding throughout all these years, and we are going to need $1.3T next year for ONE YEAR only. I don't need your "flight to safety" argument with no numbers to back up, please tell me exactly which country can buy how much of our $T. In the last 12 months, these foreign governments were only able to add $600B, how do they cough up the extra $1.3T? And since we are in deflation, most people are losing money , so where do you find that many private parties to come up with the shortfall?

In case you do not already notice, there are lots of countries that were already DUMPING the US Treasury in September, when USD was actually strengthening, flight to safety my ass.

We are losing world dominance already, it is a matter of losing it the more stealthy way, or losing it the utterly ugly way. I am fine with either way, the result is the same, USD is game over.

OO, I'm not sure I follow your argument. If you believe that the dollar will crash next year because foreigners cannot or do not want to refinance our maturing debt, please consider the following.

Interest on national debt for 2005, 2006 and 2007 was $352B, $405B and $425B respectively. Estimates for 2008 and 2009 are closer to $500B. Note that this is interest payments on total national debt (not just treasuries held by foreigners) that stood at about $9.2T at the beginning of this year.

I would argue that consumer debt is far more relevant to this discussion (and infinitely more difficult deal with) than government debt, but since you seem to be dwelling on it, let's discuss the national debt.

First, I think we can agree that unfunded liability costs and interest on the national debt do not stay constant and tax receipts will not rise enough to cover rising interest given skyrocketing unemployment and plummeting consumer spending.

You imply that the likely scenario is to inflate away this debt. Yet at the same time you point out that the viability of US debt obligation is in jeopardy. Think about what an inflationary environment would do to interest on the national debt. We won't even delve into future costs on unfunded medical liabilities, social security payments, increasing mortgage rates and energy costs, all in the wake of one of the biggest recessionary periods in our history.

Inflating debt away is only possible when consumers and businesses are willing to take on more debt, asset prices rise and interest on debt is not prohibitive. None of these conditions exist today nor will it for years to come.

On the otherhand, the US government would find it far easier to deflate debt away. Let me explain.

Given the massive interest payments on national debt, refinancing that debt at a much lower rate would greatly alleviate that burden.

Deflation can drive long term interest rates down significantly and allow the US government to then refinance the entire national debt at those lower rates.

For example, interest on the national debt for fiscal year 2007 was $430B, about half of which went to foreigners.

Average interest rates of non-discount securities last year was almost 5%. Now imagine what would happen if interest rates fell close to zero and the government could refinance all that debt long term at significantly lower rates (like 2%). The long term benefits on interest payments would be enormous.

As for the flight to safety, just one look at the gains in US bonds lately should quickly settle that argument. There is no lack of demand for US treasuries anywhere in the near future as indicated by the market.

Finally, what evidence supports your claim about dominance? The China decoupling theory has recently been shown to be myth and there's a good chance we'll soon see their currency crashing. So I'm not looking at China to increase it's dominance anything soon. The EU? Let's not kid ourselves, please.

Please, give me your estimation of which countries combined can buy that $1.3T (hint: what they add cannot exceed their entire foreign reserve), please specify and be exact.

I know you didn't ask me; but how about the Cayman Islands?

"Inflation is absolutely NOT a possibility for years to come. The financial system is broken and might not be repairable. When inflation does start to return, it will be gradual and we’ll have plenty of time to act."

FALSE - When a currency collapses prices increase dramatically even with slow business conditions. Ask the Icelanders!

"The value of the Icelandic krona has been cut in half since January."

http://news.scotsman.com/world/A-nearriot-and--parliament.4722970.jp

Does anyone really believe that China will continue to buy US Treasuries at such a torrid pace given the resources needed to pacify the masses?

http://tinyurl.com/68fjya

"Today, around 500 protesters rioted at the Kai Da toy factory in Dongguan in the Pearl River delta, flipping over a police car and trashing computers in a dispute over payoffs to 80 fired workers. Tens of thousands of factories across the region have already shut their gates. "

kewp,

you are right, Cayman Islands and BVI, Channel Islands will have UNLIMITED ability to buy our debt, completely unlimited. They can buy $1T an hour, but by then, we will be running at hyperinflation, my loaf of bread will cost $1K.

Speaking of which, I'd better start stocking up more rice.

deflation,

I am talking about about inflation as RAW PRINT on a small scale. Nobody takes on any interest, Fed just print the extra money by devaluing the USD. We pay nothing, we just pay in the way of spill-over inflation. Just imagine adding a 0 to everyone's asset and pay, and cost of goods. Debt is denominated in USD and it stays fixed, if I print an extra 0, done.

RAW PRINTING is the ONLY OPTION left at this point. Either we default within 12 months and face hyperinflation right away as USD ceases to exist in its current form, or we raw print in smaller scale first, then ramp up the scale later, hoping that nobody notices enough to start dumping USD asset in a big way.

Nothing else works at this point. We will be lucky that we stop at $1.3T deficit next year, given what Obama promises, we are looking at $3T. The current total holding of foreign interest in T is only $2.8T, and you ask them to double in one year? Domestic Americans don't have that kind of money, period, and even if you confiscate the net worth of the richest Americans, you can't even come up with $3T.

Paul: Iceland is an unusual case. Most of their food and other goods come from imports. Hence when the krona lost value, their citizens really got hammered. It would be hard to exactly replicate that situation in the U.S., as our food and much of our goods are produced by people compensated in our own currency.

"Ask the Icelanders!"

If we were anything like the Icelanders, the game would be over. If you looking for comparisons, try Japan but keep in mind that they were in better shape than we are when they first started tackling deflation (i.e. they were in a better position to resist it).

"Does anyone really believe that China will continue to buy US Treasuries at such a torrid pace given the resources needed to pacify the masses?"

And the alternative? Invest in their own dubious currency? The USD is more attractive right now. It will remain so for years to come.

Gold is an alternative, and I'm long but the USD is the better play right now.

China does NOT have the money to buy $1.3T, or even half of that. NO USD to buy, ok? Understand, it is not like China has the printing press, they can only print RMB, they cannot print USD.

China's total foreign reserve is shy of $2T, and they just announced an internal stimulus plan of $600B, leaving them less than $1.4T. You ask them to buy $1.3T on top of that $1.4T, where does the money come from???

Please understand, China has NO MORE USD to buy our $T even if they have to.

Those are interesting points to consider, are we like Iceland or are we like Japan. We are not like either of them, so our collapse will unfold differently.

"Deflation" has a point that we can be self sufficient for nearly everything we need except some "strategic" metals. (Yes we can be self sufficient in energy because we waste so much of it).

But Japan had a balance of payments surplus the whole time of its problems. We will have some real hardships to make that adjustment.

Since probably everyone will devalue their currency in a race to the bottom, there will be no currency to devalue against. Except maybe bullion. In that case it is just as probably inevitable that the world will go onto a new gold standard.

OO, either you're misunderstanding how the economy operates or I'm simply not grasping what you're proposing.

I assume we're speaking about the real world and not some hypothetical world where the laws of economics don't apply.

So you think we might have a $3T budget deficit next year? That's quite a deficit indeed. But let's deal with facts for a moment.

The Fed IS printing money at an unprecedented rate, right now, and have been for some time now, as shown here:

http://research.stlouisfed.org/fred2/series/BASE

I'm not quite sure what you mean by "printing extra money by devaluing the USD". And while I can imagine instantly

adding a zero to everything denominated in USD (from a purely hypothetical perspective), except for debt (whose

debt, I'm not quite sure as someone's debt is another's asset), I can't imagine how this would be done. While we're

pretending, why don't we just say we'll discover how to do cold fusion? Then we would be sitting pretty.

I think I've explained why I think inflating debt away is not an option in my last post. No reason to repeat.

You believe the end of the dollar will occur (either through default or hyerinflation) in 12 months, so what are you

doing about it? Long gold? Long commodities? Short UST bonds? Those strategies haven't played out well recently. Expect more of the same for some time. But don't fret, because your day will eventually come (assuming you don't go broke in the meantime:).

"China does NOT have the money to buy $1.3T"

There's that 1.3T again. Where do you get that number?

OO,

What you are missing (and most inflationists are guilty of this) is that thanks to fractional reserve lending, our 'money' supply is really a debt supply. And we've already had as much debt inflation as our economy can withstand.

You may have heard of the credit bubble? Or the housing bubble at least; do you think all those speculators paid with cash?

The 'printing' you are referring to is a desperate attempt by the Fed to keep the banks solvent in the wake of historic debt defaults; which are only getting worse over time. Debt destruction = money destruction. Or, as its more commonly known, deflation.

OO says: China does NOT have the money to buy $1.3T, or even half of that. NO USD to buy, ok? Understand, it is not like China has the printing press, they can only print RMB, they cannot print USD.

China’s total foreign reserve is shy of $2T, and they just announced an internal stimulus plan of $600B, leaving them less than $1.4T. You ask them to buy $1.3T on top of that $1.4T, where does the money come from???

First you say that China can't print USD, and then you say that we have to deduct their internal stimulus package from their USD reserves. So which is it? Their internal stimulus will be in RMB, not USD. That comes off their printing press, not their forex reserves.

I think this point has been beaten into the ground, but China cannot stop buying U.S. dollars and U.S. Treasuries. They have to create a trade imbalance to continue their growth, which requires a solid supply of our currency so they can continue pegging as they like. We don't take RMB, so they only way they can make that market is to buy dollars and T-bills.

Also, the T-bills they already hold generate payments, and that money must be re-invested. Until China starts buying goods from us in huge amounts, they will continue to accumulate dollars and dollar-denominated securities.

I do think that at some point the deflation here will stop. The banks will acquire enough dollars and T-bills in exchange for rotten assets to deleverage sufficiently. As long as they can mark-to-model (now supported by law), the reality of their worthless paper is suspended indefinitely. But when the banks are finally sated, I fear that there might be a huge reflex action where suddenly lending becomes attractive again, and all that 1% money rushes into the stock market, commodities and whatever new ponzi scheme we invent for 2010-2020.

If we get into that situation, that's when interest rates will shoot sky-high. I plan to convert my cash and commodities holdings into long term T-bills and retire to Iceland.

:o

Brand,

if we are in deflation, how do we send USD to China so that they can buy our Treasury?

If we do not reflate the economy, who is going to buy any China-made products? The chain of recycle can only be maintained by inflation, not deflation. We must buy more and more China-made goods (in value) so that they can have more and more money to buy our $T so that we can fund our bigger and bigger deficit.

Our money supply does NOT need to be debt if the Fed just RAW PRINTS, and it will. It just gives everybody extra money without any strings, which is the most effective way to set off inflation.

Where do you think the Fed comes up with the $600B to buy the mortgage bond to cause the bond rate to go down on Tuesday? The Fed's balance sheet only has $450B Treasury left and the rest is all junk, so how do they come up with $600B to buy?

Deflationists fail to see that there is one powerful tool that can change the rules of the game drastically, RAW PRINT. If the government just gives everyone $1M, with no strings attached, and it doesn't even take out any loans, how will that not set off a hyperinflation? Now, scale that back, assume the government starts with $1K a head first, then ramps up as situation gets worse.

Our FY2009 budget starts off with $500B deficit. In the last 3 days, we committed another $800B on top of the $500B making our total FY2009 deficit to be $1.3T.

China will have to use their foreign reserve to solve its own internal problem because its internal fiscal budget just went negative. People keep talking about China buying our T, but how much can they buy? If there are nobody buying our T, if we don't raw print, then we will have to default, no other alternatives.

The end is deflation, but we will go through a hyperinflation to get to deflation, and if we are lucky, we will get to deflation through very high inflation. When government raw prints, it is not creating debt, it is creating money, money out of thin air with no debt no collateral no nothing attached, just money, as simple as that. The Fed has already started raw printing.

It is very easy for us to add a 0 to everything. Probably not a 0, but bring up the price of everything 3-4x.

We just talk to our biggest creditors China and Japan, and say, look, we can never repay you given our exchange rate as it is. We will just default and you will get nothing.

Alternatively, you guys and the Europeans help beat my exchange rate down another 80% over the next 5 years, I will pay you back the nominal amount, and you can still get 20% of your money. And I will start to raw print since you won't be buying my T any more but you cannot dump, because if you dump, you get nothing.

That will easily boost the nominal price of USD-denominated asset.

I don't do margins, futures, so it will be really hard to bankrupt me. For gold, I have now completely swapped out of my paper positions, and I only hold physical outside of the US, I have 0 ounce in this country.

I won't short US T, because raw printing can go on for a while without much of an effect. But I am accumulating more energy, which I think is oversold.

Saw this on CR today:

The last thing anyone needs to worry about is fall in Chinese demand for US treasuries.
...
The World Bank forecasts that China’s current account surplus will RISE not fall in 2009, going from an estimated $385 billion to $425 billion. How is that possible if real imports are forecast to grow faster than real exports? Easy – the terms of trade moved in China’s favor. The price of the raw materials China imports will fall faster than the value of China’s exports. China’s oil and iron bill will fall dramatically.

http://calculatedrisk.blogspot.com/2008/11/everything-you-wanted-to-know-about.html

Kind of blows OO's argument out of the water.

OO,

We already had inflation, a deflationary collapse and are experiencing
reflation now. The inflation was the credit bubble.

You will be proven correct if the Fed just prints money and mails it to people as a stimulus check. However, I do not think anyone either in our government or the Fed is dumb enough to go that route.

A better compromise would be to allow small, low-interest loans directly to consumers to pay off high interest personal debt. Or get first-time buyers into foreclosed homes.

It's not a bad idea to hold gold. It has done well historically even during deflationary periods and will certainly do much better once inflation kicks in.

Energy might see more down side and will have a long way to go before a meaningful rally I believe.

We haven't seen the end of the deflationary collapse. Not even close. There's still alotta deleveraging going on.

Yeah, gold has held up remarkably well, as Peter Schiff recently opined.

Good to see one of his investments didn't go down the toilet!

I agree re: deleveraging. We still have all the alt-a, neg-am and prime loans to work through. Subprime was the literal tip of the iceberg.

Wu Hu Imrich is not Bing Bing Broke?

"Paul: Iceland is an unusual case. Most of their food and other goods come from imports. Hence when the krona lost value, their citizens really got hammered. It would be hard to exactly replicate that situation in the U.S., as our food and much of our goods are produced by people compensated in our own currency."

Right; they are unusual in that they import food and other goods like the USA is unusually as we import most energy and manufactured goods. Oh wait, that sounds very similar dont you think??

Aside from electronics, our manufacturing imports are less than people seem to think. And we import most of our oil, which is not the same as importing most of our energy. Our power plants will continue to operate without foreign oil (although at reduced capacity); people can survive if they have to carpool.

We would not starve, freeze or go naked without foreign trade. You can argue that the USA and Iceland are similar in that they both have imports, but the magnitude of those imports and the severity of their absence make that a poor comparison.

Brand,

That's and excellent point. When it comes down to brass tacks, what matters is being able to provide your poplace food, water, shelter and basic goods/services.

So everyone has to suck it up and go on a consumption diet for a few years. Would do us all a spot of good, in my opinion.