WHAT THE DEFLATIONISTS ARE MISSING
13 January 2010 by Cullen Roche
10 Comments
The following research comes to us courtesy of Casey Research:
Disclosures - Unless otherwise noted, authors have no positions in any securities mentioned and readers should never consider this to be investment advice. Always consult your financial advisor before acting on any ideas.
Comments Guideline - Readers who denigrate authors or other readers will be banned without warning. This site does not tolerate any sort of reader abuse. The goal of this site is to create an environment that is conducive to learning and better understanding of the monetary system and the investment world. We expect readers to behave maturely and responsibly. We welcome and encourage intense and intelligent discourse, but the site adheres to a strict 1 strike policy. While it is your right to speak freely, it is not your right to behave childishly. Above all else, please enjoy the site. It is intended to be used as an educational tool and we hope the intelligent and mature debate will further that purpose. We hope readers will make an effort to respect that goal. Comments with excessive linking or foul language will be moderated before posting.
Comments
This guy is missing the boat. No one denies that the idiots in Washington will try and prevent deflation. What he misses is that his faith in their ability to reverse deflation is severely misplaced. What he also misses is that the Fed, the White House, and the Treasury will sacrifice the stock market, housing market, and every other market to save the bond market. Hence why they want to steal all our retirement money and give us annuities, just another trick to keep the bond market ponzi going. The bond market will indeed crash eventually, but well after the stock market and everything else does after they have been led to the sacrificial altar to save the bond market. That is deflation, plain and simple.
The monetary chart looks a lot scarier than it is. That money is literally just sitting there. It’s like me printing a billion in my bedroom and locking up the money in my garage. You don’t get inflation unless wages pick up, and let’s just say the labor market is under a bit of pressure these days.
And he makes a massive assumption by saying “Once the money starts to flow.” That’s the whole point, all that liquidity ain’t flowing otherwise we’d have a neat pile of singles next to our toilets. And if he wants evidence of massive deflation, he should compare his current home price with the 2007 assessment. Sorry, we’re not Zimbabwe and inflation ain’t happening anytime soon, if at all.
Have to agree. But there is a legion of investors piling into gold based on these false ideas….
You’re absolutely correct, and your logic there is at the center of why gold is a bubble. However, that doesn’t mean this bubble doesn’t have a long way to go before all is said and done. I feel 99% sure in saying that the markets will break thru the March 2009 lows, but I keep thinking what will Bernanke’s next move be when that happens. My assumption, to borrow again from Koo, is that he’s going to stock thousands and thousands more apples in the store in the form of QE. I think that will be the trigger for gold making it’s ascent to the $1500-2000 range. But make no mistake about it, gold will crumble once people realize all the money printing is impotent and deflation is the order of the day, not inflation.
Keep in mind that these same false ideas are at the center of the rally as well. The Casey Report is using QE to justify inflation (falsely in our opinions). Investors, likewise, are looking at QE as something it isn’t and making trading decisions (ie BUY ANYTHING) based on this false assumption. That’s why the crash is going to be spectacular. That’s why Prechter is 200% short. Just don’t ask me when, I’m not even going to pretend to know that answer anymore. I just know it won’t happen when everyone expects it to ie 2H 2010.
All of which is why the Lending figures (especially to Commercial & Industrial, and Consumer) are going to be key. To the extent there’s not lending, there’s no major transmission mechanism (the minor one of course, is Banks printing money and paying bonuses to their staff) for the FED’s monetary efforts to find its way into the real economy and cause the “expected” inflation.
as i understand it, there is about $1T in reserves (ie deposits) at the fed that weren’t there a year ago, the effect of the fed buying treasuries, agency debt, mortgages etc and paying for it with money created by hitting the return key on the printing press; these reserves pay no interest, and will not until the fed decides to do so; what is to keep this money from circulating through the system?; can’t banks use these deposits in the same way that i can use my deposit with citibank…ie withdraw it?
They (Banks, investment firms, etc) already have taken that money out — by selling those things(agency debt, mortgages, etc) to the FED.
They then went out and spent that money buying new shiny things (like equities, treasuries, hy bonds, currencies, etc)…all of which is great for driving the markets up but less good for actually impacting the economy (bar the impact, of course, of the bonuses for those who work for the bank/investment firms/etc).
inflation is what will save our only remaining manufacturing(the only way you add value to anything) industry-housing……and make jobs….and jobs are the only thing that will get anyone reelected……which is all they are worried about.
these blown up dollars will make people whole in their mortgages.freeing up that market.
helicopter ben will force the bond vigilantes there.
Think Casey Research needs a lesson in Econ 101 when he states deflation is desirable because the value of money (per unit) increases. From a really simple economic viewpoint, Deflation can happen in two ways: (1) supply curve increases, (2) demand curve decreases.
The former is desirable. A classic example of this kind of deflation would be technology – as production costs decrease, the supply curve shifts out and everything gets cheaper.
The latter is most definitely not desirable. While it’s true that the per unit value of money increases, there are fewer effective units out there. An effective unit takes into account both the quantity and the velocity of money. So we can have deflation when the Fed prints vast quantities of dollars because the velocity of money has shrunk.
I think you’re right on the money. One could also ask the Japanese for their perspective on how ‘desirable’ deflation truly is.