Inflation vs Deflation

by JASON | 9:04 AM in |

Update 6/2/2009...

Prices in the US fell in the year to April at the fastest annual rate since 1955, labour department figures showed on Friday, as declining energy prices pulled back the cost of living.

Separately on Friday official figures showed that US industrial output slid again in April, but at a more modest pace than in prior months, and consumer confidence rose in May to the highest level seen since before the collapse of Lehman Brothers last September.,Authorised=false.html?


Consumer prices are falling year over year in China. Bear in mind that falling prices do not constitute deflation which is a monetary phenomenon (a reduction in money supply and credit) not a price phenomenon. In this case we see both.see link for article

In contrast to what Keynesian clowns believe, there is no recovery, only another artificial boom, and a mini-boom at that. Printing money can "stimulate" (using the word incorrectly), only as long as the spending continues.

Easy money and unwarranted stimulus created the global housing bubble. Now Keynesian clowns think it will do something productive. It can't, therefore it wont.

In regards with China, there is massive overcapacity already. US consumers are still retrenching. Adding to China's productive capacity is exactly the wrong thing to do at this stage. The export model is dead. The Shopping Center Economic Model Is History as well. Thus "stimulus" (here and in China) is guaranteed to fail, leaving still more overcapacity when it does.

Green shoots are a Keynesian mirage.

I have only one question for those who speak of "green shoots":

What are you smoking?

Let's start with a really ugly report from The Nelson A. Rockefeller Institute of Government:

The trend in state and local tax collections has been clearly downward from 2005 growth that was unusually high, and 2006 growth rates that were more in line with historical averages. Figure 1 shows the four-quarter moving average of year-over-year growth in state tax collections and local tax collections, after adjusting for inflation. Year-over-year change in state taxes, adjusted for inflation, has averaged negative 1.1 percent over the last four quarters, down from the 1.4 percent average growth of a year ago and 3.4 percent of two years ago.

There are a number of graphs in that paper, one of which shows that right around January (the latest for which they have complete data) there is an uptick in Goods consumption. This is part of where the Kudlow "green shoot" brigade is getting their information from.

However, if you look at the graph, you will see that every year there is a similar tick upward in consumption, although the exact date of it does vary by a month or two.


It's called Christmas!

State Sales Tax Revenues tell the story. California is absolutely cratering, for example:

Sales taxes were $452 million lower (-50.9%) than last April, and personal income taxes were down $5.7 billion (-43.6%).

Fifty percent?! FIFTY?

California is responsible for thirteen percent of the total US GDP and if it were an independent nation it would be the tenth largest economy in the world.

The idea that we can have some sort of economic recovery while the sales tax receipts - which are a direct measurement of consumer activity - are down by half is pure insanity. Where is the economic activity that is going to create this "recovery"?

And let me remind everyone - sales tax receipts are not a lagging indicator, they tell you what is going on right now.

Well for one...what they say they are doing and what they actually are....can be two different things!

For example this multi trillion dollar (est. at $9 trillion off-balance sheet transactions) disappearance at the Fed - Where did the money go? Who got it?

Also where are the stats on the money pulled out of supply by paying back or defaulting on debt?

According to Zillow we've lost close to $8 trillion in residential mortgage value so far....those assets were leveraged at least that's a pretty hefty hit to the financial system. And that's just residential (one component)...

The Federal Reserve reports that delinquency rates rose sharply in Q1 in all categories.

Commercial real estate delinquencies (6.4%) are rising rapidly, and are at the highest rate since the early '90s (as delinquency rates declined following the S&L crisis).

Residential real estate (7.91%) and consumer credit card (6.5%) delinquencies are at the highest levels since the Fed started tracking the data (since Q1 '91).

Although there is credit deterioration everywhere, the rise in these three categories is especially significant. There was also a significant increase in C&I delinquencies (commerical & industrial).

see my post...

In terms of what I see happening (and you can relate it however you see fit) I think actual cash will get harder and harder to come by as debt is retired or defaulted on - collapsing credit i.e. money supply. I also don't see the consumer bouncing back....even most optimistically it will be years if not a decade down the road (and I'm a pessimist as I think its going to collapse - also I think that is the plan). The general argument against my premise is the government is pumping all this money in....which I believe is a facade created by the media and Osama. What might actually trickle into the system won't hit until late fall or early spring and will be more than offset by falling income tax revenue and rising social expense. Plus it will be a one time pump (the institutions, universities etc, can't hire as its a one-time payment so it goes for stuff like new classroom equipment, seats, etc.....effectively boosting and then collapsing said industries as demand hits quick n' hard and then dries up for years - meaning the suppliers won't be hiring for the long-term). Meanwhile we are quickly falling off a cliff as noted in several of the examples I cited (meanwhile the media talks about "green shoots" - must be the ones they are smoking!).

My understanding is the Treasury schemes Geithner, etc are putting into place are actually more detrimental to the economy thereby hastening the collapse by undermining the markets ability to adapt to conditions...or risk. The flow of the bailout money appears to be directed to the one or two big banks that are intended to own everything when its all said and done.

Despite these ultra low interest rates credit is still collapsing meaning any move to the upside on interest rates with be completely and utterly catastrophic (which you state) - and very very quickly....mitigating any chance for a controlled collapse...which is what they are seeking. It would also be an obvious move and incite the populace to anger. But luckily they don't have to change anything as mathematically there is no hope for recourse on the current course at the current levels (which have taken decades to achieve)....I'll let Karl take it from here....

There are only two ways to get a debt millstone off your neck - pay it off or default it.

It is mathematically impossible to pay off all the bad debt in the system. This leaves only one choice: defaulting the unsustainable private sector debt, cutting government spending back to what is sustainable plus a surplus (without accounting games) and repudiating the so-called "promises" that are economically impossible to keep.

Which the populace doesn't want to hear and would create the kind of riots that cause regime change...not the kind they want...

If you invest today on the premise of a "Weimar Hyperinflationary Explosion" you are going to get killed. We already had severe monetary inflation but the statistics failed to capture it - now we're experiencing the deflation that must follow as debt defaults but most are failing to recognize it due to the original false signal. Simply put, the cost of government debt service makes an intentional decision to "hyperinflate" as a potential path "out" impossible; compare the outstanding present federal debt ($9 trillion) .vs. the Federal Budget ($3 trillion in the latest budget) and the problem that such a path presents becomes clear. The government's funding costs can and will exceed the entire budget if they attempt this sort of scheme, which is why the government will not allow it to happen. The Federal Government is NOT going to put the shotgun of monetary policy into its own mouth and pull!,-but.....html

Actually they may just pull the trigger to bring about change to another system of government (and control)...

Sounds to me like people are spending their mortgage payment on Starbucks Lattes and telling the lenders to go to hell. After all, the reality "on the ground" is well-captured here:

Current-dollar personal income decreased $59.9 billion (2.0 percent) in the first quarter, compared with a decrease of $42.9 billion (1.4 percent) in the fourth.

Personal current taxes decreased $193.5 billion in the first quarter, in contrast to an increase of $19.7 billion in the fourth.

How do you spell "off-the-charts increases in defaults"?

Green shoots eh?

Those are weeds folks.

The math is never wrong and once the marginal GDP contribution of a new dollar of debt goes negative you enter a mathematically-certain circumstance where further forced borrowing and lending, whether by government or private enterprise puts the entire economy at grave risk of all-on collapse.

That "event horizon" is dangerously close and may have been crossed. An exact measurement of this point, and determination of where it lies, is not possible. However, we know for a fact that a new dollar of debt has generated as little as ten cents worth of GDP as recently as the last year - and this was before you committed to pump nearly $2 trillion of new debt into the economy with your current budget.

I would like to see the Government try to "prop up" the economy with new spending and temporary deficits. That would be a nice idea - if we could afford it and if the mathematics suggested that it would work.

Sadly the mathematics suggest exactly the opposite - that such a policy as you have adopted will bring extremely short-lived and fleeting "benefits", if it brings any benefit at all, and runs the severe and immediate risk of pushing the "contribution to GDP per dollar of debt" value into negative territory.

I understand the argument that we "must invest for the future."

That argument is true, standing alone.

The problem, Mr. President, is that we have squandered the ability to make that investment in the present tense, and until we force the bad debt out of the system, thereby clearing the ability for new debt to contribute to GDP instead of sink it, your program cannot succeed and bring forth the benefits you seek.,-Open-The-Other-Eye!.html

It all depends on perception - i.e. what benefits are actually being sought...

Anyone who has ever used a credit card (that would be most of us) knows how this works. If you walk into a store and buy a flatscreen TV for $1500, pulling out the plastic, you have taken an action that in fact has increased your cost of ownership of that television, not decreased it or kept it the same. Even if you pay it off at the end of the month, the store has paid a discount charge on your use of plastic (typically from 1-3%), and had you paid in cash you might have been able to negotiate for some or all of that as a lower price.

Further it is inevitable that you will be eventually forced to either pay for the TV or go bankrupt. Many people played the "roll it over" game with credit cards for years, taking the balance on one card and rolling it to some new card before they had to pay it off. That game can continue for quite some time but eventually you reach the end of the rope where lenders will no longer finance this charade, and you're once again forced to cough it up or go under.

Our government has become a machine to play "kick the can", but increasingly that can has been filling up with cement and it is moving a shorter and shorter distance with each kick. Eventually we will stub our toe.

In 2000 had we taken our medicine the total contraction in GDP necessary to restore balance was approximately 10%, or $1 trillion dollars in net output that was being "pulled forward" via debt service, plus the embedded cost of interest.

Today it has doubled as a direct consequence of our attempt to borrow and spend our way out of 2000-03 recession.

While it appeared good initially, we bought only a few short years of apparent and false prosperity, instead digging an even deeper hole into which the average American has now descended.

Government has learned exactly nothing from this; here are some excerpts from Tim Geithner this morning on "This Week". Note the contradiction:

GEITHNER: I think a lot -- people worry about this. You have a recession like this, which is born out of a period where people borrowed too much, and we let our financial system take on too much risk. The risk in that conduct is you have a longer, slower, more gradual process of adjustment and recovery.

The first part is right. But the second part isn't correct - it's a dodge for what was intentional misrepresentation of risk in instruments that the lenders knew were being mispriced.

GEITHNER: Well, we're going to emerge out of this stronger. And we're going to do that because the president and the Congress are going to make sure that we have the government doing a better job of things it needs to do.

Riiight. The very same Congress that passed Gramm-Leach-Bliley dismantling Depression-era regulations that would have prevented most of this silliness had they been in place? The very same Congress that has refused to rein in The Fed for effectively expropriating the power of appropriation that The Constitution gives exclusively to The House of Representatives? The very same Congress that not only allowed Henry Paulson to ramrod a bill through giving him plenary authority to spend $700 billion but when presented with hard proof that he knew full well prior to final passage that he did not intend to do with it what he had said with the first half, they let the other $350 billion out anyway?

GEITHNER: Well, you know, we want to have sustainable growth. We don't have -- we don't want to have a recovery which is going to be artificial and short-lived, just produce the seeds of the next crisis.

We want to have a durable recovery based on a stronger foundation that has a stronger, more productive economy emerging through it where the gains are more broadly shared across the economy as a whole.

You can't get there without reducing the debt back to sustainable levels. Levels that were sustainable and proved as such over the previous fifty years. Levels that are roughly half of where they are now. Levels that would require, with a constant GDP (ha!) the default or repayment of some twenty-five trillion dollars in debt!

Anyone with more than two firing neurons and a basic understand of mathematics knows that eventually you must face the music with such a policy. We are simply arguing over when that music will be faced, not if.

In order to restore economic balance without massive defaults you would have to more than double GDP while not taking on one more dollar of new debt. That is obviously not going to happen, as put forward by President Obama's budget - in order to achieve that he would have to have promulgated a budget that was balanced, yet find a way while doing so to get GDP growth back on track and forsake private credit growth.

Well that should be more than plenty of Karl's articulate ranting to get the point across...

Wages are actually declining...depending on the specific "essentials" there is movement both up and down....I'm don't have a clear perspective or opinion on how the dollar will play out....and the ramifications to us because of that because...

1) We are the world's consumer so as we go down so does the rest of the world - see Japan article in the post - Foundation of the Pyramid

2) The central banks are all tied together so it depend upon how "they" want to see it roll out - I'm thinking they want the country to go down....but can we do without most of what we import (not including food from Canada and Mexico - which is currently at risk from drug wars, flu, etc)? Would it provide stimulus for internal goods which would provide internal stimulus and further hamper globalization and the rest of the world?

So if the rest of the world rejects the dollar does that make it worthless? What does the rest of the world do with the ones they have? Doesn't that hurt them just as bad as it hurts us putting us all in the same barrel of crap? IMO they need to sell just as bad as we need to buy....

At the end of this New York Times report about the rapidly changing views of the Chinese government toward buying more U.S. government debt comes this gem (hat tip MW).

After six years of silence, China unexpectedly disclosed last month that it had been gradually buying gold from domestic producers. The country’s reserves had climbed from 600 tons in 2003 to 1,054 tons, worth $31.8 billion at prices late Wednesday.
A person in periodic contact with China’s central bank, who insisted on anonymity to preserve his access, said that a Chinese central banker complained to him last year that “we have so much money and there’s so little gold, we can’t buy much without driving up the price.”

If they were smart, they'd buy another six or eight thousand tonnes of gold before announcing anything more to the rest of the world and just let everyone speculate if and how much they were adding to their stockpile - this would still leave intact the bulk of their massive $2 trillion in reserves, most of which is still denominated in dollars.

My prediction....

The Wall Street Journal reports($) that the scourge of deflation will be sweeping the globe in the days ahead - China today, then on to Europe, and finally it'll wash up on the shores of the good 'ol US of A on Friday when the Labor Department reports April consumer prices.

Falling energy and food prices have pushed down global inflation, and that will continue. Barclays Capital economists expect the U.S., U.K., euro-zone and Japan to rack up negative year-over-year CPI readings through at least September.

That will stoke worries about a global wave of deflation, an unstoppable price decline that causes consumers and investors to park cash on the sidelines, crippling economic growth.

Gather the women and children and plan for the worst, hope for the best.

....a little humor....

In talking with people about our current economic situation I keep hearing a common theme and general fear that we are about to experience hyperinflation. The example often referred to is the Weimar Republic. The theme is exemplified in the following articles...

People here and elsewhere have been asking where all the money comes from to pay for all the world's governments' rescue plans.

Apparently they haven't read Ben Bernanke's comment in 2002 (back when his then boss Alan Greenspan was inflating his way out of the collapse of the Dot.Com bubble and sowing the seeds for this latest collapse):

The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost...

Author Peter Schiff points out in this CNN interview that Americans blew through their savings in the Dot.Com crash, too few people want to lend to Americans now, so to pay for all those rescue plans Americans at least "are reaching for the printing press."

The hyperinflationary frenzy which engulfed Weimar Germany in the years immediately after World War I, is a dramatic example of what can happen to a nation when its productive capacity is destroyed, and it turns to the printing of money to preserve its economy. It also serves as a road map of where the United States, indeed the world, is headed, if we continue down our present path.

Twentieth-century economic history generated two great bogeymen: the Great Inflation and the Great Depression. The memory of both continues to haunt policy-makers.

The world’s most dramatic and most famous inflationary experience of the 20th century was Germany after World War I — though other central European countries had similar experiences. By November 1923, the German currency, the Mark, had fallen to one trillionth (1/10 12 ) of its pre-war value.

In the last stages of inflation, prices changed several times a day. Shopkeepers followed the foreign exchange rates, and immediately adjusted their charges. Vast amounts of paper money were needed to make even the smallest purchases. Instead of purses, people used first baskets and then wheelbarrows to carry their money.

Ultimately, inflation destroyed German savings, and made the economy of the unstable democratic Weimar Republic vulnerable to yet more shocks. It also had a dramatic effect on popular and political psychology.

The German postwar inflation and hyper-inflation of the 1920s had two fundamental causes: a low savings rate, and bad monetary and fiscal policy. One consequence of World War I was an erosion of incomes, and a dramatically reduced savings rate. But at the same time, at least for a while, Germans were able to sustain their living standard, and run large trade deficits.

They had this luxury because investors from around the globe bought German assets: currency, securities, real estate. British and American investors were gambling on a German recovery. After all, before 1914, Germany had been, with the United States, one of the world’s two strongest economies.

Only at a relatively late stage in the story of the German inflation, in the summer of 1922, did foreigners begin to realize that Germany was unlikely to be able to pay all its debts — including the financial reparations that the Allies demanded under the 1919 Versailles Treaty. In the summer of 1922, the assassination of Foreign Minister Walther Rathenau underlined the political instability of the Weimar Republic. From that moment, foreigners no longer wanted to buy German assets. The big capital flow of the earlier period came to a stop. The Mark went into a free fall.

The second driving force of the inflation was the policy of the German government and the German central bank. Both were sensitive to political considerations. Both worried that rising unemployment might destabilize the precarious political order. So they were willing to do anything in fiscal and monetary policy to counteract economic slowdown. The government ran large budget deficits as it tried to keep up employment in the state-owned railroad and postal systems, and also to generate more purchasing power. It kept on looking for new ways to administer repeated fiscal stimuli.

There was, in short, what would now be called a “Havenstein put” — in which the central bank would keep its interest rate at levels sufficiently low so that German business could continue to expand.

The United States today is clearly a different economy and society than Weimar Germany. But the same kinds of forces that blew up Weimar’s money are threatening.

Potential Future Hyperinflation

Walter "John" Williams thinks out of the box. He makes disquieting reading, but you won't find him in the mainstream. At least not often. He runs a "Shadow Government Statistics" site with an electronic by-subscription newsletter. Anyone can access some of his data and occasional special reports. They can also assess his reasoning. In his judgment, government data are manipulated, corrupted and unreliable. He's not alone thinking that

Federal bailouts have worsened things. Dollar creation exploded. Crisis has been pushed into the future. Its enormity will be far greater, and foreign investors will get stuck with a lot of it. When it arrives in strength, capital outflow will follow, and dollar valuation will plunge with it. Williams believes that "both central bank and major private investors know that the dollar is going to be a losing proposition. They either expect and/or hope that they can get of (it) in time to lock in their profits (or for central bankers) that they can forestall the ultimate global economic crisis" as long as possible.

Dollars are very vulnerable in this environment. If Treasuries are dumped, the Fed will monetize debt to make up the difference. Inflation will then accelerate, multi-trillion dollar deficits will worsen things, and a "self-feeding cycle of currency debasement and hyperinflation" will follow.

Cash as we know it will disappear. A barter system and black market will replace it or possible introduction of a new currency. Since most money today is electronic, not physical, chances of it adapting "are practically nil." With hyperinflation, electronic commerce would completely shut down and economic collapse would follow. Gold and silver will be invaluable. Holders could exchange them for goods and services.

Physical goods will also be precious for survival and as a medium of exchange. Anything with a long shelf life may be stocked in advance, and providers of essential services could barter them for goods and other services. Forewarned is forearmed. Safety and liquidity are crucial. Anything retaining value is essential. Real estate, other currencies for example. Foreign equities and debt to a small degree because US financial assets hammering will spill everywhere.

With all that to deal with, consider another dilemma - the likelihood of painful political change, civil unrest, disruptive violence, and utter chaos. If Williams is right and hyperinflation arrives, Katie bar the door on what may follow. Revolutions are possible with three notable last century ones to consider - in Russia, Weimer Germany and Nationalist China. In each case, the old order ended, everything changed, but not for the good. How does Williams advise? Evaluate one's own circumstances, use common sense, and forewarned is forearmed. That will help, but hard times hurt everyone.

Hopefully they won't arrive, at least not full-blown as Williams predicts. But make no mistake. Excess has a price. The more of it the greater. America has an ocean of it. Sooner or later comes payback. "Things that can't go on forever won't."

Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at

Also visit his blog site at and listen to The Global Research News Hour on Mondays from 11AM to 1PM US Central time for cutting-edge discussions with distinguished guests.

We've had hyperinflation (in terms of 25% or higher - I'll call it "high" inflation) for the past 7 or 8 years due to the abundance of credit and the outright force feeding of debt. Precisely why the dollar collapsed during the same time period. Let's define the terms:


Inflation: Bigger increase in dollars than goods and prices rise. At the consumer level you will see it in increased costs for goods. From the business perspective you will see greater demand for your products which ripples through the supply chain to the basic ingredients - commodities.

Deflation: Less dollars than goods and services. Demand dries up on the consumer end causing falling prices which ripple up through the supply chain to the commodity inputs.

We are now seeing deflation ripple up through the supply chain. The source of the supply chain, basic ingredients, is now falling fast in an effort to keep up with the still faster falling demand.

Here's an example:

Sunhu's New Year metal sales drop 95% Ningbo Sunhu Chemical Products Co, China's biggest nickel trader, said its post Lunar New Year sales slumped as 90 percent of its customers remained closed because of a lack of demand.

Sales in the first two days after the week-long holiday dropped 95 percent from the same period last year, Kevin Ji, chief analyst, said in an interview with Bloomberg News yesterday.

Nickel futures have tumbled 60 percent in the past year as the global recession slashed demand for the metal. China accounts for about 25 percent of global demand, Ji said.

There are only two ways "they" (let's call them globalist banks) can prevent deflation: (1) is to force the people to take on more debt - won't work we've passed the tipping point of our ability to take on new debt and the trend is now to save. (2) is to print more money and get it in the hands of the people via another method like zero taxes or massive rebate checks (like $10k or more for each person)- that also isn't happening.

The only way for inflation to get reignited is to reignite demand. That means getting actual money or increasing debt at the consumer end. All the dollars or credit in the banking "system" won't have any impact. The money has to get to the end of the supply chain and utilized for consumption of goods and services.

Greenspan pulled off the turnaround last time by dropping interest rates below the rate of inflation. This effectively created hyperinflation as people increased their debt loads at a compounded 14.7% per year for over 7 years while wages trickled up 2.3%. Not only were people able to increase their debt loads but they also were able to extract savings via home equity extraction - on a level never experienced before ($300-$700 billion per year peaking in 2006).

Further debt statisitcs:

The total overall household or personal debt outstanding in the United States increased by another trillion dollars to 13.8 trillion dollars in 2007. This is an eight percent increase over the year before and a 97 percent increase since the year 2000, when it was 7.0 trillion dollars.

The two main components of household debt outstanding are mortgage debt outstanding (2007 total = $10.5 trillion) and consumer credit (2007 total = $2.6 trillion). The rate of increase for mortgage debt has been much higher than that for consumer credit. Mortgage debt increased by eight percent over the last year (slightly lower than the nine percent increase last year), but more than doubled (119 percent) since 2000. Consumer credit debt increased by 8.3 percent from last year and 53 percent since 2000.

The National Debt has continued to increase an average of
$3.42 billion per day since September 28, 2007!

The number one difference between the Weimar Republic and our (US) current situation is we don't print our own money. The Federal Reserve, a private banking entity, loans us the money we use.

Sidenote - for more information on the Federal Reserve and its operations:

If all of the loans in the world were repaid there wouldn't be one red penny in circulation in the United States of America. It would all disappear back into the computer chips and into the vaults. There would be no money in circulation. Every bit of it is based upon debt and that debt creates money that literally has nothing behind it at all.
- C Edward Griffin

Link for personal download...

Again the only way they can pull off a recovery is to get huge quantities of cash or debt (utilized credit) in the hands of the consumer. I don't see that happening. Do you?

The only other possible avenue is dollar dumping by other countries. They are already doing that to boy up their own currencies. See the reality is everyone pumped up the credit via stimulus from their "central" banking. This is not just the US but worldwide.

China artificially held exchange rates low so they accumulated massive amounts of dollars - along with several other natural resource (mainly oil) suppliers like Brazil, Russia, Saudi, etc.

Problem is demand has fallen off a cliff now and those countries are spending their reserves to stay afloat. Its a global issue now. One might argue that China would dump dollar reserves but what are they going to buy....the assets are falling in value because of the demand collapse. They already have far more manufacturing capacity than the world can ever hope to utilize with the current banking structure.

Everyone owes the big banks!!! Its time to pay up the interest. Who created the extra money for the interest?

Say hello to my little friend called deflation!

Eventually hyperinflation will follow. The deflation dries up the demand so all the factories get shuttered. The digging, mining, extracting, growing of raw materials dries up. Then eventually the demand comes back after consumers work their way out of the debt traps. The problem is the demand goes up first and then ripples through the supply chain to the raw resources.

Well there is a time lag in the supply chain. It takes time to build factories. Takes time and resources for mining, farming, etc. After getting burned there is a greater time lag as investors make sure the demand is real. In the meantime demand far outstrips supply causing hyperinflation.

The dirty culprit in this nasty cycle is debt. Debt creates artificial demand. Artificial in the sense that we only temporarily have this extra demand. We are borrowing this demand from tomorrow and sooner or later - the debt has to be paid back with interest.

Back to our current situation. We've just hit the end of 15+ years of the biggest debt bubble in the history of the world. That means 15+ years of artificial demand or demand sucked from the future. China has more shuttered factories than they know what to do with. Ohio, Michigan, and the rest of the manufacturing belt are now called the "rust" belt.

As with all cycles you can expect the dip to roughly equal the spike. Perhaps not in time limits but certainly in scale...and on the deflation side even more so due to the interest component.

Hyperinflation won't be on the horizon for quite some time!

What about bail outs?

Don't hold your breath. $800 or $900 billion is a drop in the bucket. The housing boom generated trillions in debt accumulation and spending.

What they need is a gavage...oh they already used one when they dropped interest rates below the rate of inflation.

The great question is...can they get the money into the "system" or in other words, can they get the people to take on additional debt - to the level desired?

To answer that question:

Consumer credit capacity is pretty much done. Sure, not everyone, but it doesn't have to be for just needs to cross the tipping point. The fact of the matter is that even a 10% contraction in consumer credit capacity is calamitous for the entire economy, because the consumer is 70% of GDP and they've spent $6 trillion over the last few years in the form of MEWs (Mortgage Equity Withdrawals). That, to put this in perspective, is 10% or so of GDP all on its own.

A lot of people are still talking about "hyperinflation", and citing "M3" and similar.

The fact of the matter is that "M3" did not capture the shadow credit creation by non-bank entities but it does capture the forcible conversion of that "shadow" credit into bank credit! If you invest today on the premise of a "Weimar Hyperinflationary Explosion" you are going to get killed. We already had severe monetary inflation but the statistics failed to capture it - now we're experiencing the deflation that must follow as debt defaults but most are failing to recognize it due to the original false signal.
-Karl Denninger, The Market Ticker

You saw and felt it at the ground level.

For example, a friend of mine bought a two bedroom condo on an interest only loan in 2004 for $220k. He sold that condo two years later for $457k. He cleared, when it was all said and done, $210k for living in the condo for two years...or $105k per year which was more than what both he and his wife made in wages per year.

Lots in Saratoga Springs, UT were selling for $30-$45k in the spring of 2002. In the fall of 2006 those same lots (in smaller parcels), undeveloped, were selling for $280-$330k. That is serious inflation. Real estate isn't the only example...look at commodity prices during the same time period :oil, gold, silver, aluminum, wheat, rice, etc etc.

Now let's go back to the hyperinflation argument.

A little history first. My friend after selling his condo and making a killing then decided to upgrade to a small 3 bedroom home with an option arm loan. The cost of the house was $750k. He is a school teacher and makes $50k a year. His wife works at CostCo and brings in $30k a year. Their house payment was $1750 and change per month until the loan reset and then it jumped to just over $4k per month. 6 months after they moved in the house was valued at $680k. They couldn't refinance because they owed more than it was worth. Today the home is valued at $323k. The house is in foreclosure. The wife was laid off. My friends wages are frozen and if the state doesn't get its act together he may not get a paycheck at all within a couple months.

Simply put, they do not have the income nor asset value to support additional debt acquisition or service. They couldn't support the debt service they had which caused the foreclosure and bankruptcy in process (default). That was prior to the wife losing her job.

Each day the unemployment numbers jump. At the beginning of the year the numbers doubled. That isn't conducive for taking on more debt.

One of the brilliant aspects of Greenspan's play was the banking products that allowed additional leverage to be generated against the assets. Greenspan also initiated the "sweeps" program in 1994 where they sweep out your average account balance from your checking account into a savings account where it can be loaned out. Over $700 billion in 2007. We've already seen 42 to 1 leverage ratios. My friend lost half the value on the house. That is the asset. Now apply the leverage ratio to the asset for the final loss to the system.

Nationally, Zillow said that U.S. homeowners lost a total of $3.3 trillion in home value during 2008. Value fell faster as the year progressed - $1.4 trillion was wiped out during the fourth quarter alone, more than the $1.3 trillion lost during all of 2007, Zillow said. A total of $6.1 trillion in U.S. home value has evaporated since the house market's peak in 2006, according to the Zillow.

Multiply the $3.3 trillion of 2008's estimated loss against a conservative ration of 12:1. That's a conservative loss estimate to the "credit system" of $40 trillion. You are comparing $800 billion that may be leveraged to a $73 trillion loss in leverage ($6.1 X 12:1). Remember we are talking about single banks with over $87 trillion in derivative exposure. Kind of like the guy trying to stop the catastrophe by putting his fingers in the dike.

Simply put, the cost of government debt service makes an intentional decision to "hyperinflate" as a potential path "out" impossible; compare the outstanding present federal debt ($10.7 trillion) .vs. the Federal Budget ($3 trillion in the latest budget) and the problem that such a path presents becomes clear. The stated interest paid on the national debt last year was over $400 billion. The government's funding costs can and will exceed the entire budget if they take on re-inflating the system.

Sidenote: More information on "sweep" program...

Some early sweep software operated over weekends. These programs reclassified transaction deposits as savings deposits (MMDA) just prior to the close of business on Friday and moved the funds back to the transactions account just prior to the opening of business on Monday. Because reserve requirements are computed on the daily close of business level of deposits, including Saturday and Sunday, doing so avoided (on average) more than 3/7 of the reserve requirement on these deposits (Friday, Saturday and Sunday, plus an occasional Monday holiday). Later software chooses an optimal strategy based on customer's payment patterns. A constraint is that the number of "transfers" (reclassifications) from MMDA to a checkable deposit must be six or less each month. (More than six and the MMDA is subject to reserve requirements as a transaction deposit.) Hence, all of a customer's funds must be reclassified as checkable deposits on the sixth transfer.

Anyway, because of the sweep programs, any increase in the amount of money that the public puts in checkable deposits will be quickly "neutralized" and transferred into money market accounts, which is why the quantity of checkable deposits were so stable from the mid-1990s until just recently. Because the narrow money supply measure M1 consists of currency plus checkable deposits (and traveler's cheques, but that amount is relatively trivial), this also meant that M1 became quite obviously irrelevant as the key component of checkable deposits had become a constant number that never changed regardless of monetary conditions. The entire increase in M1 from 1996 to 2008 consisted in the increase in currency in circulation.

But now something has happened again. If you look at the M1 graph, you can see that there has been a recent sharp increase in M1 which only to a minor extent can be accounted for by an increase in currency in circulation. Instead, as can be see in the graph below, checkable deposits have suddenly surged after having stayed basically constant for more than a decade. They have now for the first time exceeded the pre-sweep peaks.

The explanation for this is that the rules have again changed. Remember, the reason why banks have tried to minimize checkable deposits is that they have wanted to minimize required reserves. And the reason why they have tried to minimize required reserves is that they have had an opportunity cost in foregone interest. But now that the Fed has started to pay interest on reserves, that motive for minimizing reserves has been removed. And with no motive for minimizing reserves, this means that there is no motive for performing sweeps any more, which is why checkable deposits (and therefore also M1) have increased so dramatically recently.

Sweeps are automated programs that "sweep" funds from one type of account into another type of account automatically. In this case we are talking about programs that allow banks to "sweep" funds from checking accounts to other types of accounts such as savings accounts that allow money to be lent out.

Wow! Let's lend out every penny. Why not? Who needs cash? Savings deposits already have a reserve requirement of zero, checking accounts are the next logical extension.

Inquiring minds are now asking "How much money are we talking about?" That's a good question too. As stated, 100% of savings deposits have been lent out. If you have money in a savings account it simply isn't there.

Savings deposit figures are readily available. However, checking deposit figures are grossly distorted by sweeps as discussed.

Sweeps Data

The Fed hides sweeps data in an obscure online publication called swdata. Scrolling to the bottom we see 759.8 billion in sweeps. That means only $300+- billion of $1.059+- trillion cash that should be available on demand is actually available on demand.

Back to the focus on inflation vs deflation...

What if the currency is devaluated?

Wouldn't this raise the water level and all the assets - heretofore falling - now float upward again? All the falling asset values would get pumped full of fresh air. Deflation is stopped dead in its tracks and starts to turn in the other direction. All the losses hitting all the banks are now staunched. The leverage ratios go down to something resembling sanity.

Devaluated against what?

The foreign governments are already divesting (or have divested) themselves of their dollar reserves to prop up their own currencies. That is the beauty of globalization....everyone pumped up their currencies (economies with credit) and now they are all deflating. Whether the reliance is on manufacturing & outsourcing (China, India, Germany, Eastern Europe, Canada, etc.) or commodities like oil and gas (Saudi Arabia, Iran, Russia, Venezuala, Brazil, etc.) or financing (Iceland, England, US, etc.).

Name a country that is on solid footing right now...

China laid off 2 million workers at the start of the year and is facing a 40 year drought. Their largest reservoir is at half of what it was at the same time last year. They have invested fortunes in manufacturing capacity that is now under-utilized. The overhead costs are spread over fewer and fewer units - like the US auto manufacturers.

Russia is dying quickly from the demise of oil. Europe is having a real estate disaster of its own with the UK leading the way. Need I go on???

The past game of devaluation was brought to pass by petrol-recycling and China's currency peg....that game is over as demand is drying up.

Bernanke has already bumped the Fed Reserve assets by $2 trillion in the last 6 months....has it had any positive effect? We are insolvent. More debt doesn't fix the problem. If they print like crazy and give the money away the banks will get paid back cheaper dollars.....which is 6's with defaulting on the debt...either way the banks get screwed.

They didn't create this mess (decade's of effort, advertising, subliminal stimulus, etc.) just to let us off the hook at the end by wiping out the debt. Debt is ultimately deflationary!

We aren't seeing destruction of fiat currency...or more appropriately the loss of confidence in the currency by the people. We haven't seen that either. What we are seeing is the lack of currency....the collapse in spending.

Again the main point is that we have experienced "high" (I'll use that term instead of "hyper") inflation over the past 4 or 5 years due to the degree of debt that has been taken on by society. This inflation is not the result of printing money. They have conditioned us to an inflationary environment but due to the fact that it was created by debt (and not a loss of confidence in the fiat currency or excessive printing) it is temporary in nature and will ultimately resort in much more severe deflation.

The foundation: looking back through history....all of the inflation we (the US) have seen (since 1913) was due to an increase in debt either via the people or the government. The big bankers have never (to the best of my knowledge) opened up the printing press. They have undermined the currency in other ways such as removing the gold standard (done via the government) but ultimately, never actually printed currency beyond the constraints of requests by Congress and the Treasury.

They have also undertaken drastic steps to ensure that the currency still maintained a perception of value...i.e. after dropping gold moved to an oil backed currency - can't buy oil anywhere in the world (except Iran currently) except in US dollars. On a side note, Saddam started selling oil in Euros six months before we invaded Iraq. Within a couple weeks of takeover, we switched back to US dollars despite the Euro having a 15% premium.

I believe the next steps in the process of moving from a democracy to an oligarchy require a drastic change in psychology. In order to effect that change the globalist need to create massive fear and social disorder. Little steps like rolling all of the little banks and credit unions into a massive conglomerate require a substantial number of defaults. The national ID card, another small step, requires buy in by the people. In order to get the general public's buy in they have to carefully lead us down the primrose path. Create panic while making it look like they are doing everything in their power to stop it. People are conditioned to inflation. Deflation is an upset. As people experience deflation or in other words, the crushing weight of debt and they are going to beg for any kind of solution to alleviate the pain. Congress appears hard at work on that!

The trick of it is we've hit the tipping point in our ability to take on debt as individuals. Its taken almost 100 years but we are there! The globalist know this and know the only choices left are to actually print more money (without the debt obligation) or deflation.

Here's the scenario....

You've been loaning this person (Jake) more and more money for quite some time. Not a big deal since you create the money out of nothing. The money is created against the debt he takes on. You profit by siphoning off the interest and are a happy camper.

Jake's standard of living gradually falls as the benefits of his labor are steadily siphoned away in interest expense. He doesn't really pay attention as its hidden in the gradual increases of the costs in the goods he acquires. Eventually it gets to the point where you are loaning Jake money to cover interest costs.

Alarmed that your game might come to an end, you steadily lower Jake's interest costs (since the money is free to you anyways) in an effort to keep Jake producing and keep your interest coming. Jake responds by borrowing in ever increasing quantities as he is now fully addicted to debt. You remove all restrictions - accepting whatever collateral he proposes at whatever value he can assign to it.

Finally Jake gets to the point that he can no longer keep borrowing. Jake has reached the tipping point and can no longer sustain the interest costs of his current debt.

So the question is....Jake owes you a great deal of money. Jake is insolvent meaning he can no longer support the interest costs of the debt let alone pay you back principal.

What do you do?

You can forgive the debt - which could be a write off or the gift of debt free money; or

You can seize the assets which, at any value, is still a very nice return since you created the money out of nothing; or

You could seize the assets and put Jake to work directly for you. Jake becomes a slave to you. He keeps the assets producing and you now take all the benefits of his labor. You give him just enough to sustain himself and keep him producing.

What is your choice?

What happens in deflation when people default? You get the assets at rock bottom prices!

A new article excerpt I posted Monday...

This week, President Barack Obama and his Treasury secretary, Timothy Geithner, will prepare the United States for the next, and far more difficult, step: another attempt to fill the huge hole blown in the center of the nation's financial system.

Meyer and other economists, however, say they are encouraged by the Obama administration's exploration of ways to draw private investors back into the market for "toxic assets." If the price of those assets drops low enough, and the government is willing to guarantee investors against losses, "I think there is a lot of money on the sidelines that may come in to buy these up," Meyer said. "There's a great profit opportunity here."

To get to that point, however, the moment when the government can leverage private money to supplement taxpayers' investments, will require a change in the national psychology. That, in the end, will be the administration's greatest challenge.

Bold italics is mine.

We were buried in 2000 and suffering severe economic health pains of excessive debt. Greenspan (Fed Reserve) dropped the interest rates below the rate of inflation. We accepted the gavage he offered us and shoved it down our own throats. Then we gorged ourselves on the debt.

Now we are insolvent and ready for the slaughter! Sure there are a few who have been wise but they are by far the minority!!! And odds are their wealth will shortly be sucked up helping friends and family members out who haven't been so wise!
The name of the game is to grab complete control of the world's financial system down to the neighborhood level - ultimate control. That means a banking roll-up and nationalization of the banking system for every country in the world. That requires a massive amount of defaults. That is what is coming and will be the result of deflation!

The question is - Can they control the ensuing chaos in the process of the power grab?

Again, California is the canary in the economic coal mine to keep your eye on.

So far all California is doing is stealing from the people(squeeze the little guy), talking about raising taxes (further squeeze on the little guy), and government bailouts (even more squeeze but on the little guy but with a broader audience).


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