Heinz on deflation, gold, and other things
Date: Wed Apr 14 2004 12:18
trotsky (Carmack, 11:10) ID#377387:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
precisely - one has to look at ALL the goods and services we consume in order to arrive at a proper estimate of aggregate price inflation. naturally, the central banks have eroded the purchasing power of fiat money enormously in the long run ( say over the past 8 to 9 decades ) - but during the recent disinflation era since the 1980 inflation peak, many sectors of the economy have experienced productivity spurts that have far outpaced the increase in money supply, so many prices have fallen IN SPITE of the CBs ministrations.
inflation arguments often center on the price increases in 'necessities', but this overlooks that the general standard of living has increased enormously since the end of WW2, so that even the lower income strata these days tend to buy a TV, a car, the latest electronic gizmo, go on vacations, etc. - and nominal price increases in items such as gasoline recently really don't amount to a whole lot in real terms, even considering the mild aggregate inflation since 1980. so it certainly makes sense to focus on the whole picture, and not just a slice of it that tends to conform to one's leanings.
Date: Wed Apr 14 2004 11:57
trotsky (Hambone, 11:05) ID#377387:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
it is true that the Fed, as well as other central banks, are going to try to fight deflation with everything they've got - it is in fact inter alia this expectation that drives gold prices during deflationary eras, as well as general systemic worries. but i disagree that they will resort to the famed 'helicopter money' drop. you just have to look at past CB performance during deflations to realize that they don't tend to deviate too far from their normal modus operandi - the reason imo is that they're well aware that destroying the currency in this manner ( i.e., helicopter method ) will hurt them more in the long run than help them, i.e., is a sure way for them to lose their power. and don't forget: they DO represent the creditors, not the debtors.
given that, inflation can only take hold under certain conditions. it requires for instance a continuing stream of willing borrowers, since fresh funds must be borrowed into existence in the current system. with total credit market debt to GDP at a record 350 - 360% recently, where are those borrowers going to come from? the CBs certainly will boost free reserves in the banking system, drop their lending rates to zero, etc., but they could be faced with that money just sitting there, doing nothing. that's the BoJ's experience over the past 13 years for instance, and was the Fed's experience in the 30's.
the only willing borrower usually found in such circumstances is the government, and consequently some degree of govenment debt monetization can be expected ( and with it, another round of misallocation of resources ) . but again, Japan stands as an example as to how not even that helps...it can only slow the process down, but not entirely stop it.
btw., only people up to their eyeballs in debt need to fear deflation. it's good for everyone else ( the more prudent you have been financially, the better it will be for you ) . it actually helps put the economy back into shape, as it tends to redirect malinvested capital toward wealth-generating activities. the more the CBs and the government interfere with this process, the longer it takes ( again, japan and the 30's both serve as excellent examples of how to botch a healthy bust and transform it into a catastrophic , seemingly never-ending debacle ) .
Date: Wed Apr 14 2004 11:37
trotsky (Carmack, 11:01) ID#377387:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
since the allegedly 'stupid tech funds' have been net long silver ( in varying degrees, but always net long ) from the very lows all the way up, the argument that they have somehow 'lost money' to the 'evil dealers' seems pretty hard to sustain.
you only need to look at a silver chart to determine who lost the most money recently - hint: it wasn't the longs, in spite of the recent correction.
another thing: open interest in COMEX silver contracts is far from an extreme - during the 70's , it was at times four to five TIMES larger than it is now.
Date: Wed Apr 14 2004 11:00
trotsky (kapex@'hyperinflation') ID#377387:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
you're hallucinating. last year's broad money supply growth in the US was the slowest in 7 years - interspersed with a rare decline in money supply intra-year, which hadn't happened since 1961. money velocity meanwhile is at a 25 year low. at the same time, the world is literally drowning in an overabundance of cheap manufactured goods, boasts huge industrial overcapacities as well as excess labor out the wazoo, and sports the biggest private sector debt mountain ever witnessed in history.
none of this spells inflation, much less 'hyper-inflation'. i realize only a handful of people even think deflation is possible in a fiat system, but it has 1. obviously already happened before ( which by itself refutes the 'impossible' claim ) and 2. the above conditions are exactly the fundamental backdrop one would associate with an oncoming deflation train. don't let the rise in commodity prices ( which is mostly due to money supply inflation in China coinciding with 20 years of underinvestment in the sector ) and the attendant brief spike in the CPI measure fool you - it acts like a tax on consumers and companies alike, and actually reduces discretionary funds, which is likewise deflationary in the long run. |
