[SchroedingersCat]

Liquidity is the crux of the matter. The Fed is trying to keep the banks liquid. The amount of money (cash or electronic) floating around at any given time is enormous. Did you know the average ATM machine has $20,000-$40,000 cash in it? How many ATM's in the US? The networks that acquire and process the debit and credit card transactions every day need to have reserves to back up what they process. These reserves are held at banks.

It would take very little to disrupt the very well coordinated dance of trust that makes up our current economy. Access to funds can disappear with the click of a mouse in a data center.

[Twilight]

I'm with the deflation camp. Governments have debt too. If they monetize, their creditworthiness is finished. Instant pariah status. Difficult to rebuild a reputation after repaying foreigners with purposely debased currency. And the bigger they are, the longer they have to fall. But if they stand back and allow deflation to happen, only their citizens' creditworthiness is finished, not their own. Sucks to be that generation, but life goes on.

Which will they choose? Not a tough call.

For some reason there is a stubborn belief widespread among people who view government as being a force for bad, that the natural choice will be hyperinflation and gold offers the individual a way out. I think they fail to realise that deflation does the better job of preserving a government's power relative to the people. If they take malvolence as a starting assumption, why do they have it destroy itself? Their argument is a non sequitur.

I don't have a financial background, but there are only two possibilities here and I can see which makes more sense on national interest grounds.

[mattduke]

$this->bbcode_second_pass_quote('Twilight', 'I')'m with the deflation camp. Governments have debt too. If they monetize, their creditworthiness is finished. Instant pariah status. Difficult to rebuild a reputation after repaying foreigners with purposely debased currency. And the bigger they are, the longer they have to fall. But if they stand back and allow deflation to happen, only their citizens' creditworthiness is finished, not their own. Sucks to be that generation, but life goes on.

Which will they choose? Not a tough call.

For some reason there is a stubborn belief widespread among people who view government as being a force for bad, that the natural choice will be hyperinflation and gold offers the individual a way out. I think they fail to realise that deflation does the better job of preserving a government's power relative to the people. If they take malvolence as a starting assumption, why do they have it destroy itself? Their argument is a non sequitur.

[Iaato]

Yes, Patience, I've turned into a news junkie too trying to crystallize my thinking on the hyper-in-de-stag-flation debate. I read market ticker, along with prudent bear, safe haven, and a bunch of other blogs that come in daily on my Google Reader (if you haven't checked out Google Reader, it's worth a look). And I was home sick this week, and got to do A LOT of reading, and my thinking has crystallized. And here's what I think.

In the long term, given peak oil, we are headed for energy descent, which means long term contraction/depression/deflation. But in the shorter term of a year or two, I think that we are going to inflate the US and global fiat currency. This US govt. has two options available to it at this vulnerable turning point. It can either do nothing, and watch all of the closely connected vested interests such as corporations and wall street and the military industrial complex absolutely crash and burn. Or, it can print money and try to inflate its way out of the debt problem.

And knowing human nature, what do you think they'll do? The comment, from all the blogs, that FINALLY got my leadhead on straight with this was this comment:

"Put away your calculators, money supply counters. It's all about politics. Always has been, and always will be. Don't bother looking at the money supply and inflation statistics; they are not going to be valid when you need them to be because governments cannot play the inflation game in full view. Also remember that "inflation" comes from the Latin word means "blowing up," a succinct characterization of current events."

ITulip commentary

Given the two choices, our Fed will try to print its way out of debt, given the overwhelming set of IOUs below. It is human nature to try to forestall the pain, even if in the end, it is the more destructive route.

Fannie and Freddie-implicit IOU, basically no collateral
The banks, with Taffies, discount windows and such-explicit IOU
The bank depositors, with FDIC insurance guarantees -explicit IOU
Federal pensions -explicit IOU
Social Security -explicit IOU, nothing saved
Medicare -explicit IOU, nothing saved
Savings and Treasury Bonds -explicit IOUs
National Debt -explicit IOUs
Trade Deficit

And when we inflate, the rest of the world will inflate with us. Central bank loans do not have to be repaid if they are rolled over in perpetuity until the banks fail. That is direct monetization of debt which then enters the system. FDIC debt will be handled the same way. Just print up the money. Heck, maybe Bush's stimulus package will involve free Federal credit cards for everybody! Yahoo!

Twilight, I don't think that the current governments are worried about pariah status, because they are all going to do this together, in synchrony. The frantic plane trips among world leaders and ECB and UK bailouts suggest a lot of collaboration right now. And they know that world governments are dead anyway if they let it all crash. Which is the worse option for someone absolutely invested in the status quo? Total chaos and destruction now, or let's keep this party going another year or two, at least until I'm out of office? These folks are acting entirely on the basis of self-interest and self-preservation, rather than on the basis of national interest, Twilight. Just my lead-brained opinion, after an extended amount of time thinking about it.

It's a really important question, inflation vs. deflation. The investing responses need to be totally different for the two options. My thought is that the only really safe long term option for both cases is getting out of debt and buying gold.

[cube]

$this->bbcode_second_pass_quote('Twilight', 'I')'m with the deflation camp. Governments have debt too. If they monetize, their creditworthiness is finished. Instant pariah status. Difficult to rebuild a reputation after repaying foreigners with purposely debased currency. And the bigger they are, the longer they have to fall. But if they stand back and allow deflation to happen, only their citizens' creditworthiness is finished, not their own. Sucks to be that generation, but life goes on.

Which will they choose? Not a tough call.
....

[threadbear]

I think people confuse asset price collapse or extreme downturn, as a sure sign of deflation--as in the dirty thirties.

[CrudeAwakening]

The Fed seems to think they can counteract a tendency towards credit deflation by inflating the monetary base. But how will they ensure that the money created gets into the hands of those who need it? And if that new money is used to repay debt (deflationary), won't the net result viz a viz inflation be about zero?

[CrudeAwakening]

$this->bbcode_second_pass_quote('CrudeAwakening', ' ')And if that new money is used to repay debt (deflationary), won't the net result viz a viz inflation be about zero?

[Twilight]

We are going completely off-topic here, but I think all the bank run survival tips have been covered, so never mind.

Iaato, I agree with what you wrote above, except for two things, firstly - "These folks are acting entirely on the basis of self-interest and self-preservation, rather than on the basis of national interest" - actually as far as they are concerned, these are one and the same. The second thing is what you describe will be limited to an interval of a couple of years.

If delaying the pain to save a few chosen entities serves a government's interests, that is what they will do. They will roll loans, cut target rates, prop up the first banks that fail and use that time to do whatever they need to do. But they cannot cut interest rates below zero. They cannot blow a bigger asset bubble. They will not pay people to take money. There will be no free cash cards because their value will be zero! Once they approach that limit, it's a Japan situation all round. If/when banks collapse in earnest (more likely it will be a lengthy period of forced consolidation), everyone but depositors will lose out and will be left to accept it. The eventual outcome is deflation even if we see a brief period of inflationary policies. And it will be brief and limited in scope because while they naturally want to delay the pain, they are not suicidal. It is not in their interest to bail everybody out. By "they" I mean the US, EU and UK. They will choose Japan, not Zimbabwe. There will be governments who will choose differently, but they will be consigning their nations to an even worse scrapheap.

It is about politics, yes. But don't take the seemingly obvious for granted.

mattduke, the USD does not have to gain in value, it only has to maintain some relative value as other currencies go down the toilet, especially ones that inflate. It may no longer have a monopoly as the world reserve currency, but it will remain a major one. The fundamentals are crap, but they aren't rosy in many other places and psychology still counts for a lot.

threadbear - debts are being defaulted on as asset prices collapse. That is deflationary as the 1930s were for the US.

cube - see my response to threadbear. Defaults on debt and reduction of lending mean a decreasing money supply. The US government's actions are limited compared to the impending carnage in the private sector.

[threadbear]

$this->bbcode_second_pass_quote('Twilight', '
')
cube - see my response to threadbear. Defaults on debt and reduction of lending mean a decreasing money supply. The US government's actions are limited compared to the impending carnage in the private sector.

[Twilight]

What you describe of Japan's situation is a good example, threadbear. Governments generally like order and a nation reborn through a New Deal Mk. II is preferable to a disorderly collapse and loss of influence. I think there are powerful elements in the US in particular who are tired of seeing "decadence" all around them and would relish that sort of challenge, viewing it as nothing less than a rebuilding of the national character.

A noble cause, they could argue. And as you point out, what challenges do we currently face that could benefit from a mass mobilisation of labour? It is indeed an opportunity.

I dip into the same sites everyone else does, I agree there seems to be a consensus building around inflation, but like you I make my own mind up and at this point I am leaning the opposite way. If a new compelling argument comes along, I may change my mind, but so far it is not happening.

While cost of living is undoubtedly inflating due to food and energy components, and I can see this in my bills like everyone else, I think a lot of people are going to be blindsided on the big picture. They expect governments to do something alien to their nature, to pack up and go home, stepping aside for homesteaders who hoarded gold. While history contains examples of hyperinflation and default, it is not a long-term winning strategy.

There are exceptions, corrupt nepotic governments with no ambitions beyond self-enrichment by exploiting chaos to get away with embezzlement. They can accept permanent economic collapse if it means they get enough inside their compound, because on the world stage they are little more sophisticated than small-time crooks. For all their delusions, theirs is a tiny empire, and for losers in what is to come, look no further.

The US has more ambition than that. I think when it comes down to it, so does the EU.

Given this context, I think I see where Matthew Simmons is coming from.

Whether there is time on the energy front, is another question. But based on what I have read and understood so far, it makes sense for US and European governments to go down this road.

If someone can prove inflation over deflation with financial data, I will take a look provided it is simplified enough that I am competent to understand it. If someone can prove inflation over deflation on state/national interest grounds, good luck, my bar is set high.

[threadbear]

$this->bbcode_second_pass_quote('Twilight', 'W')hat you describe of Japan's situation is a good example, threadbear. Governments generally like order and a nation reborn through a New Deal Mk. II is preferable to a disorderly collapse and loss of influence. I think there are powerful elements in the US in particular who are tired of seeing "decadence" all around them and would relish that sort of challenge, viewing it as nothing less than a rebuilding of the national character.

A noble cause, they could argue. And as you point out, what challenges do we currently face that could benefit from a mass mobilisation of labour? It is indeed an opportunity.

I dip into the same sites everyone else does, I agree there seems to be a consensus building around inflation, but like you I make my own mind up and at this point I am leaning the opposite way. If a new compelling argument comes along, I may change my mind, but so far it is not happening.

While cost of living is undoubtedly inflating due to food and energy components, and I can see this in my bills like everyone else, I think a lot of people are going to be blindsided on the big picture. They expect governments to do something alien to their nature, to pack up and go home, stepping aside for homesteaders who hoarded gold. While history contains examples of hyperinflation and default, it is not a long-term winning strategy.

There are exceptions, corrupt nepotic governments with no ambitions beyond self-enrichment by exploiting chaos to get away with embezzlement. They can accept permanent economic collapse if it means they get enough inside their compound, because on the world stage they are little more sophisticated than small-time crooks. For all their delusions, theirs is a tiny empire, and for losers in what is to come, look no further.

The US has more ambition than that. I think when it comes down to it, so does the EU.

Given this context, I think I see where Matthew Simmons is coming from.

Whether there is time on the energy front, is another question. But based on what I have read and understood so far, it makes sense for US and European governments to go down this road.

If someone can prove inflation over deflation with financial data, I will take a look provided it is simplified enough that I am competent to understand it. If someone can prove inflation over deflation on state/national interest grounds, good luck, my bar is set high.

[roccman]

$this->bbcode_second_pass_quote('Twilight', '
')


While cost of living is undoubtedly inflating due to food and energy components, and I can see this in my bills like everyone else, I think a lot of people are going to be blindsided on the big picture. They expect governments to do something alien to their nature, to pack up and go home, stepping aside for homesteaders who hoarded gold. While history contains examples of hyperinflation and default, it is not a long-term winning strategy.

[Twilight]

$this->bbcode_second_pass_quote('roccman', 'F')or whom?

All banks today are insolvent.

The NAU and Amero are real.

Every failed empire in history has monetized its debt.

Stagflation is what is occurring and is the big picture.

I see all banks being consolidated under one (like JP Morgan)...gold going to $10,000 (and confiscated)...GDP at <1 and unemployment at >50%.

Or stagflation.

[Iaato]

Oh, bank runs, right, Twilight. I guess we are off topic. Sorry, SC. At least we're still wandering around in depletion economics. And this won't be the last time in the next 6 months that the inflation/deflation debate yanks us off topic.

Twilight, I agree that the early inflationary stage will only be a couple of years long. As Matt Duke and the article I cited before both indicate, there have not been any countries that have deflated their fiat currency in the recent history of man besides Japan. And Japan did that, I think, because they were the first first world country to complete the financial overshoot of their oil peak, and were basically alone in doing so. They had no choice, because they were alone, and were restrained enough not to hyperinflate, but also they were a country of savings. None of those three conditions exist for the US right now In our Depression, we inflated to fix the lack of circulating money; FDR bought everyone's gold and then raised the price to $35.

And dropping interest rates will do squat and is just window dressing at this point. And yes, by the time they drop cash cards, the value will be approaching zero! Twilight, look at that list of IOUs that the US has run up/is running up. Just take one of them. FDIC insurance. How on earth are we going to meet that promise when the time comes sometime this year for bigtime payouts for multiple banks. You want riots, this would be a good way for them to start.

I think the US govt. has already mentally given up on the U$D, and is preparing the Amero or whatever. Which won't do any good, but will, again, give them the appearance of a fresh start and of doing something. I would love to see a New Deal Mk II, but I'm not sure the Neocons in charge have it in them. And yes, Threadbear, it is highly inflationary. Printing money is inflationary. War is inflationary. Decreasing energy sources is inflationary. Buying up everybodies' mortgages thru the discount window until we've done a back-door nationalization of the mortgage market is, need I say it, slightly inflationary. Inflation will be our cross to bear in the short term. And I've learned enough about the problems with prognosticating timelines for complex systems to know that it's better not to say how long; the system can remain functional longer than you can stay solvent.

Here's the science behind all of this, citing my favorite thermodynamicist. The linkages between energy and money will become an increasingly crucial topic in the months to come.

Brainfood

$this->bbcode_second_pass_quote('', '"')Inflation

The buying power of money is the amount of real goods and services that it can buy. If the amount a dollar can buy diminishes, this is called inflation. Inflation can be caused by increasing the amount of money circulating without increasing the amount of energy flowing and doing work, for example, when more money is printed. It can also occur when the money supply is constant but less work is done, for example, because energy becomes scarce. As long as there is unused fuel energy to be tapped, increasing the money supply can increase the flow of energy through the system, causing growth as well as some inflation.

During wartime, even when the money supply is not increased inflation occurs, because energy is diverted away from normal production into military activities. This reduces the energy available per dollar in the main economy, causing inflation.

Depression and Recession

The depression of 1929 was caused by a shortage of circulating money, a shortage of institutions to process money, and a lack of spending. At that time, the government undertook massive efforts to increase the circulation of money and the flow of energy. Energy was abundant, so stimulating the flow of money increased the inflow of energy. The recession of the 1970s, however, was caused by a shortage of energy. Increasing the money supply did not help in this case, as there was no increase in the inflow of energy. Thus, if the economy is in a period of low growth, increasing the money supply will increase the amount of work in the economy only if there are untapped fuel reserves available. If not, increasing the money supply will only increase inflation."

[Twilight]

$this->bbcode_second_pass_quote('threadbear', 'M')ake work projects require vast amounts of deficit spending, which is inflationary...I think.

[roccman]

$this->bbcode_second_pass_quote('Twilight', '')$this->bbcode_second_pass_quote('roccman', 'F')or whom?

All banks today are insolvent.

The NAU and Amero are real.

Every failed empire in history has monetized its debt.

Stagflation is what is occurring and is the big picture.

I see all banks being consolidated under one (like JP Morgan)...gold going to $10,000 (and confiscated)...GDP at <1 and unemployment at >50%.

Or stagflation.

[Twilight]

Iaato, it will certainly be interesting to watch events unfold. I think FDIC-insured depositors and government bond holders will get their cash if they want it, they will print that much to avoid riots. But all those other IOUs, yes, uncollectable. That money is gone.

I have a feeling the US does have the discipline to repeat the Japanese example, or at least try to. We will have to disagree on that for now. A test will come when the banks start imploding. We will have to see how it is handled, and I doubt the first examples will give reliable information.

Indeed, after a gargantuan recovery effort inflation would follow deflation as surely as the phases of the moon. I don't think a deflationary collapse can be avoided at a worthwhile cost though. The measures that it would take to fix this mess by inflating may well be worse than allowing deflation to run its course and picking up the pieces afterwards. What if this time the cure is worse than the disease? The phrase "The procedure worked, but the patient is dead" comes to mind here. I suspect it is so. I may be wrong, but we will see.

roccman, if anything peak oil will make international relations more dysfunctional, not less.

[patience]

Wow. What a bunch of heavyweights here! Now I have a whole new bunch of analysts totry to understand and absorb.

Newbie question then, does the debate for what happens in the near term hinge on the scale of bailouts possible?

I've long expected the US govt would inflate away Social Security, Medicare/Medicaid. All unfunded and huge. I'm 61. Will prob'ly have to work till I die, but dammit, I'd like to get back the small fortune I put into that...

Wouldn't surprise me to see something like the old WPA and CCC happen as an inflationary response to depression down the road a ways.

I'm just looking for a place to duck and hide till this blows over, if I live that long. But I don't see one. My crystal ball is fogged up.

[roccman]

$this->bbcode_second_pass_quote('Twilight', '
')
roccman, if anything peak oil will make international relations more dysfunctional, not less.