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49 comments on The Finance Round-Up: November 29th 2007
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49 comments on The Finance Round-Up: November 29th 2007
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goritsas,
Regarding the line where you say the deflationary trend seems to be gaining strength.
Do you believe that the US$ will increase in value and purchasing power going forward? What will reverse the macro trend that has been in place since 1913?
Regards,
Gunga
I think it will, albeit temporarily. A credit implosion would make actual currency far more valuable for a while - cash is king in a deflation. Historically, credit has only been available for those wealthy enough not to need it. The recent years of easy credit have been a huge aberration that is about to end IMO, and without access to credit, people will have to rely on savings as their cushion. Those with liquid savings (who manage not to lose them in a bank run over the next couple of years) will then be very much better off than those who don't. Those without will have no margin for error in a credit crunch.
Domestically, deflation should cause the value of money to rise relative to goods and services, due to a firesale of assets such as occurred in the Great Depression. Internationally, the dollar should rise temporarily relative to other currencies as the dumping of low grade debt sparks a flight to quality, from which short term US treasuries should benefit. It's not possible to say how long a dollar spike would last. A rally could be fairly short and sharp - my WAG would be lasting several months - but we'll have to wait and see.
I agree with your logic and I don't mean to mince words but I think it is very important for people to get it right if we are to protect our families finances. I would like to suggest that a dollar spike as you decribe is more of a temporay break in the macro trend and not a change from an inflationary environment to a deflationary environment.
Perhaps a deflationary pause within a long term inflation.
Regards,
Gunga
Yes...Hyperinflation with a deflationary pause on systemic collapse.
Then G*D help us.
What about inflation in food (milk,grain,meat etc), energy and oil? As these are globally traded, it is possible that prices for these items could continue to inflate on Chinese demand even in the middle of a deflationary collapse in asset prices.
The extra money supply created during the expansion was mostly channeled into assets, so the deflationary effect sould also be seen mostly in assets. If will also show up in discretionary goods. But people don't have as much leeway to cut back on food and fuel. The drop in US demand for these items may be more than offset by increasing demand from BRIC economies.
You could have inflation affecting essential goods while deflation affects discretionary goods and assets.
The problem here is the use of terminology which means different things to different people. To me - following the Austrian school - inflation and deflation are monetary phenomena. If the money supply is increasing, we have inflation and if it decreasing then we have deflation. By this definition it is not possible to have both at once.
What you are describing is the movement of prices, which often follow changes in the money supply, but not always if other factors are at play. If the money supply were suddenly doubled while all else stayed the same, you would expect prices to double eventually as well, but all else does not necessarily stay the same.
For instance, increases in the M3 of some 13% per year in recent years have not ignited a wage/price spiral due to global competition keeping a lid on both wages and the prices of manufactured goods. Wages have stagnated, while cheap plastic tat from China has fallen in price. Stagnating wages set against a backdrop of rising monetary inflation means that wages are falling in real terms. Falling prices for manufactured goods against the same backdrop mean that prices have been crashing in real terms.
Similarly, prices can rise against a backdrop a falling money supply, which means they would be going through the roof in real terms. This could well happen to oil and food after an initial price collapse, as there are many circumnstances that could hit supply as hard as deflation will hit demand. You could indeed see food and energy prices rise while asset prices continue to fall, but calling it inflation and deflation confuses the issue.
ShadowStats says M3 is approaching 16% and seems to be accelerating. Yet it seems like deflation ought to already be happening and measurable, given the freeze up of the various securities related to real estate mortgages in the States. Is this simply being compensated (and then some) by adding money and/or credit elsewhere? How does this work, what is M3 and when and how does it end?
M3 is a measure of broad money, but not broad enough to capture the full scope of the credit expanion we've seen in recent years (derivatives and all). The money supply in broadest terms has effectively been increasing far faster than M3 would suggest.
In other words, M3 is only part way up the inverted pyramid of credit. The credit contraction we've seen this year has not proceeded down to that level yet. I would argue that it will in the new year, whereupon credit contraction will become much more noticeable to ordinary people, in terms of their personal access to credit being curtailed.
Is this 'broader' money supply the $80T number I have seen a few times that presumably refers to the products of mainly hedge funds that lever relatively small pools of, say, mortgages into mortgage backed securities? And, if so, is it safe to say that this broad supply of credit is officially deflating or is it just not inflating as quickly as it was before?
well, the derivatives market is currently valued at $516 trillion by the Bank of International Settlements (the central bankers' central bank). Most of that was money pulled out of thin air, and destined to return to where it came from IMO. I would say by the broadest definition of money supply, we are already seeing deflation. As it works its way down the inverted pyramid, it will rapidly become more apparent.
Gotcha. Austrian terminology it is.
itulip.com refers to this as ka-poom theory:
A rapid deflation caused by a credit crunch followed by frenzied inflation as central banks attempt to prop up asset prices.
Though I suppose that's just a cute name for a crack-up boom.
I'll just read the roundups and let you do the replies. :)
The trick is going to be to nail the timing of that spike, and then go all in physical gold.
Curious, wouldn't you be a little late to 'buy in' then?
No, when the dollar peaks the price of commodities will collapse before taking off on the moonshot.
If it doesn't it doesn't, if I have to be stuck in one thing I probably rather be stuck in physical FRN's if living in the US at the time.
This approach might be very different and vary by location if not in the US. Odds are that living in Canada would be about the same, they most likely will somehow peg the currencies within a narrow window at some point.
Some people that want to put a lot of time and energy into it can likely profit from fluctuations between now ant then, but unless one really needs the profit it is much safer just to kick back and wait it out. The whole thing just smells like a trap right now. A trap to suck ALL liquidity out of the markets.
Don Corleone was a boy scout compared to these guys.
This is exactly what I'm expecting to happen.
A lot of variables. But possible definitely.
However, a risky play.
Collapse of commodities isn't necessarily a fundamental move. A price retreat would be a given...but collapse.
Got ring side seats.
Well, the corrupt clowns at Fed and Treasury consider a 10% drop in their people's stock holdings a collapse that needs to be bailed out by rate cuts.
One would expect the price to temporarily drop much more then that as positions need to be covered in a liquidity trap.
Exactly how much or when is hard to say, especially when the markets are constantly interfered with.
Mushashi
I would´t wait to go into gold. This is not 1929 when we had gold backed currencies. This time after 1971 we for the first time in history have ALL currencies in the world as fiat.
I have read stories around the world that physical gold already is somewhat scarce for retail investors. When TSHTF gold could be instantly unavailable for ordinary people and shoot to outer space in price. Don´t count on a big dip in the goldprice as other assets like real estate and equities collapse. THIS TIME COULD BE DIFFERENT to earlier deflation crashes.
Even if the goldprice dips, you HAVE IT when it rebounds upward.
Edit: It would not bother me if the goldprice would dip in a deflationary collapse, because i still have the same amount of ounces i had before the collapse. And it has been an infinite yoy to exchange the soon to be worthless paper money to gold markers.
Well that´s my take, and i am already fully invested in gold and silver. So far i have gained nicely in value of my investments.
I think people who look at gold, etc look at PAST cycles.
I think (as I said below because of PO etc) this may be the end of "Cycles" for a time.
Also, how many people on earth? What if only 1 out of every 1000 wanted an ounce of Gold or Silver for the heck of it, There ain't enough in the world.
This is not your father's Commodity Cycle.
I think you agree with me with your comment, though it was not straight forward.
Be as it will, we surely have interesting times ahead. We are in unchartered waters.
That might not make it very useful as money but I would think it would make it valuable, no? Of course if you could find me a few magic beans, have I got the cow for you ... but that's another story, eh?
I can see your line of reasoning, and note that I mentioned that location would change strategy.
There are a number of legal and tax issues that may come into play in the US.
To the extent that gold can be acquired physically in small personal transactions I could see holding some now to cover the other side.
Musashi
I really don´t know how this will play out. I have thought a lot about this, and read a lot of sites about this shit.
After all, i took the decision to exchange all of my savings to PM:S. I don´t think i will loose much.
I don't know either. I'm not a formally trained economist like others here, more like a nomad that spent much of his life living in "interesting places" all over.
I would expect the Scandinavian countries to be very good places to be based on a number of different criteria.
But sometimes one can go quite a way with bad cards played right, as long as one doesn't go all in with a losing hand and stays in the game.
As credit contracts this will reduce inflationary pressure causing assets to be re-priced, downwards. And there is an awful lot of credit out there that’s going to contract. Holders of cash will benefit from these falls in prices. I’d probably be cash heavy at this point as well as having a pretty big lump under the mattress, just in case Northern Rock isn’t a one off.
If you’re asking about the dollar versus everybody else, I couldn’t answer you. I don’t see the dollar being displaced from its role as reserve currency because there are no obvious replacements. The U.S. is still resource rich and filled with capable and intelligent people able to creatively respond to the crisis at hand. I wouldn’t be inclined to write them off just yet.