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THE Deflation vs Inflation Thread (merged)

Discussions about the economic and financial ramifications of PEAK OIL
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Unread postby MicroHydro » Tue 19 Jul 2005, 02:14:26

$this->bbcode_second_pass_quote('MonteQuest', 'I') think they are calling it "helicopter money." [smilie=5propeller.gif]


I believe that 'helicopter money' or the other phrase 'hosing down the street with liquidity' are terms used to describe drastic responses to sudden events like the 19 October 1987 single day loss of 20.5% on the S&P 500. What the Fed would prefer to do is gradually devalue housing in real terms through 'stealth' inflation. As housing is the least liquid asset and not generally prone to panic selloffs, it could work that way for the rest of the decade. People could lose 40% of their real home value due to inflation without ever hearing a 'pop' of the housing bubble as their nominal home value has been maintained or even slightly increased.

As many folks have mentioned, distortion of the CPI and central bank gold sales are tactics to enable gradual stealth inflation.

Do like the helicopter beanie gif though :)
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Unread postby MonteQuest » Tue 19 Jul 2005, 02:49:19

$this->bbcode_second_pass_quote('MicroHydro', ' ') People could lose 40% of their real home value due to inflation without ever hearing a 'pop' of the housing bubble as their nominal home value has been maintained or even slightly increased.



Yes, because 65-70% of all new loans are ARM's, interest only, or minimun payment, many could find themselves upside down, owing more on their homes than they are worth, (no refi-ATM) unable to make the increasing payments due to rising interest rates, and unable to unload it. Defaults?
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Unread postby MicroHydro » Tue 19 Jul 2005, 03:31:19

$this->bbcode_second_pass_quote('MonteQuest', '')$this->bbcode_second_pass_quote('MicroHydro', ' ') People could lose 40% of their real home value due to inflation without ever hearing a 'pop' of the housing bubble as their nominal home value has been maintained or even slightly increased.



Yes, because 65-70% of all new loans are ARM's, interest only, or minimun payment, many could find themselves upside down, owing more on their homes than they are worth, (no refi-ATM) unable to make the increasing payments due to rising interest rates, and unable to unload it. Defaults?


This a subtle point, but as per my previous post, there has been some dark discussion in banking circles of a possible finesse by the fed to solve this conundrum. Long interest rates (the 10 year T-bond) could be allowed to rise as Greenspan wants them to. Short rates could be kept negative in real terms (as they are now). Then the fed encourages lenders to issue a series of short term low interest loans to bail out the ARM debtors. It is really rather brilliant in an evil and devious way. The debtors pay off their ARMs with new short term refi loans. The banks get the fees from making new loans. Repeat when loans expire as many times as necessary as long as you own the home, paying a loan origination fee to a bank each time, which can be financed with a small increase in nominal home value. The debtors are never upside down in nominal terms, but they effectively will have to pay rent to lending institutions not for a mere 30 years, but indefinitely. It is win/win for the lending institutions. The homeowners are very cleverly screwed without even understanding it as they continue to make payments on assets that are (very slightly) gaining in nominal value while significantly losing real value. This is gradual currency devaluation, but not runaway Weimar hyperinflation.

Bottom line, there is a way to establish what Warren Buffet called a 'sharecropper society' without ever 'popping' the housing bubble and causing a wave of defaults. The new generation of homebuyers will 'own' their homes by continually 'renting' money from the bank and never build any equity as the true value of their properties continues to erode. Voila, serfdom, 21st century style.
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Unread postby MonteQuest » Tue 19 Jul 2005, 03:40:20

$this->bbcode_second_pass_quote('MicroHydro', ' ')
This a subtle point, but as per my previous post, there has been some dark discussion in banking circles of a possible finesse by the fed to solve this conundrum. Long interest rates (the 10 year T-bond) could be allowed to rise as Greenspan wants them to. Short rates could be kept negative in real terms (as they are now). Then the fed encourages lenders to issue a series of short term low interest loans to bail out the ARM debtors.


Yes, because as short-term rates approach the bond rates, the carry trade becomes risky. This would renew it, so to speak, at least the effects, right?
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Unread postby MicroHydro » Tue 19 Jul 2005, 18:14:18

$this->bbcode_second_pass_quote('MonteQuest', '')$this->bbcode_second_pass_quote('MicroHydro', ' ')
This a subtle point, but as per my previous post, there has been some dark discussion in banking circles of a possible finesse by the fed to solve this conundrum. Long interest rates (the 10 year T-bond) could be allowed to rise as Greenspan wants them to. Short rates could be kept negative in real terms (as they are now). Then the fed encourages lenders to issue a series of short term low interest loans to bail out the ARM debtors.


Yes, because as short-term rates approach the bond rates, the carry trade becomes risky. This would renew it, so to speak, at least the effects, right?


Exactly. What finance wants is to borrow short and lend long at a higher rate, the usual basis for banking profit. As to whether this finessed soft landing to the housing bubble can actually be engineered is an open question. The Fed's failure to prevent a 60% fall in the NASDAQ with the dotcom bust doesn't inspire confidence. On the other hand, housing is a unique asset class due to the lack of liquidity which makes a sudden sell off impossible. Perhaps with more creative lending and soothing media manipulation, an abrupt implosion of housing values can be forestalled. We shall see.

Either way, I vote for increasing inflation on average, whether moderate 1970s US style inflation or extreme 1920s German style inflation (following a short term deflation) the future will tell.
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Unread postby MonteQuest » Tue 19 Jul 2005, 19:22:13

$this->bbcode_second_pass_quote('MicroHydro', ' ')Either way, I vote for increasing inflation on average, whether moderate 1970s US style inflation or extreme 1920s German style inflation (following a short term deflation) the future will tell.


That has my vote as well.
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Inflation or Deflation?

Unread postby falser » Sat 13 Aug 2005, 02:25:47

Up until now I've assumed that because oil is rising it will be a major upwards influence on inflation, which is by historical standards extremely low. Gasoline will cost more, thus everything else will cost more due to general energy costs and shipping etc. But others on this board are predicting a deflationary period. Can someone explain why deflation may be a possible scenario due to Peak Oil?
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Re: Inflation or Deflation?

Unread postby MonteQuest » Sat 13 Aug 2005, 02:36:03

$this->bbcode_second_pass_quote('falser', 'U')p until now I've assumed that because oil is rising it will be a major upwards influence on inflation, which is by historical standards extremely low. Gasoline will cost more, thus everything else will cost more due to general energy costs and shipping ect. But others on this board are predicting a deflationary period. Can someone explain why deflation may be a possible scenario due to Peak Oil?


40% of our GDP growth is financial speculation. In other words, where there is great liquidity ( lots of cash about) due to easy credit, it usually causes inflation in the CPI (consumer price index). This time, the money went into asset inflation (mainly real estate). As interest rates rise to curb the inflation ( most of the real inflation is hidden, as they don't count food and energy) this asset economy or bubble will pop, deflating those assets which are the source of the consumer economy money.

The asset "wealth" is an inflationary illusion. It's not really there. No fundamentals to support it.

Then, we may see hyperinflation as the FED prints money to support the crash of assets and the dollar.

Did you follow that?
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Re: Inflation or Deflation?

Unread postby rogerhb » Sat 13 Aug 2005, 02:48:37

$this->bbcode_second_pass_quote('falser', 'w')hich is by historical standards extremely low


As long as you discount the entire history of money! Inflation was effectively zero for the whole of the 19 century, and then we went fractional, off the gold and then fiat.
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Re: Inflation or Deflation?

Unread postby seldom_seen » Sat 13 Aug 2005, 02:55:13

$this->bbcode_second_pass_quote('falser', 'I')nflation or Deflation?

Stagflation, stagnant economy rising inflation.

I think however that oil depletion will generate a new species of flation: "conflation." Contracting economy with runaway inflation.
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Re: Inflation or Deflation?

Unread postby tdrive » Sat 13 Aug 2005, 02:58:16

$this->bbcode_second_pass_quote('', 'C')an someone explain why deflation may be a possible scenario due to Peak Oil?


The prices fall simply because people have no desire to buy -- leading to a vicious cycle of consumers postponing spending because they believe prices will fall further -- then businesses can't make a profit or pay off their debts, leading them to cut production and workers, leading to lower demand for goods, which leads to even lower prices. A trigger is required, and this could be that people will have no desire to buy because a certain sector (energy) of the consumer basket will have very high prices thus limiting their total purchasing power, then businesses can't make a profit or pay off their debts, leading them to cut production and workers, leading to lower demand for goods... etc. The conventional wisdom is that this will lead to demand destruction, people will consume less energy, so eventually the inventories will build, the energy prices will fall down, and we will jump out of the hole. This is conditional on abundant supplies of energy, of course, and if energy start running out, all bets are off, we end into a deep Depression, with a capital D.

A bursting of the housing bubble could also lead to deflation.

I personally think a stagflation scenario will be more likely in case of high energy prices.

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Re: Inflation or Deflation?

Unread postby falser » Sat 13 Aug 2005, 03:28:52

Thanks for the reponses. I guess I have a hard time mentally understanding what deflation really means and what the mechanism is since I've never experienced it personally. I don't know when the last time deflation has occured in the US.

I understand now how in the long run deflation would occur. But what about the short & mid term (ie 1-5 years). Inflation is currently rising, and it's undoubtedly because of oil. I don't see this stopping anytime until after oil hits $100+/barrel and completely wipes out the economy. There will have to be some pretty severe inflationary years in the near future, won't there? Hyper-inflation as MontQ suggests. Is deflation therefore only a long term prediction, after things get really bad, and stagflation as a likely scenario for the next 5-10 years?

I'm trying to evaluate what I do with my savings right now - eg. buy stocks now & gold later, vs, buy gold now and hoard it.
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Re: Inflation or Deflation?

Unread postby MonteQuest » Sat 13 Aug 2005, 03:51:56

$this->bbcode_second_pass_quote('falser', 'T')hanks for the reponses. I guess I have a hard time mentally understanding what deflation really means and what the mechanism is since I've never experienced it personally.


Deflation occurs when their isn't enough money supply to consume production, so prices fall as businesses compete for the available money.

People stop buying houses and the price collapses.
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Re: Inflation or Deflation?

Unread postby freetoken » Sat 13 Aug 2005, 05:10:31

$this->bbcode_second_pass_quote('falser', 'T')hanks for the reponses. I guess I have a hard time mentally understanding what deflation really means and what the mechanism is since I've never experienced it personally. I don't know when the last time deflation has occured in the US.


There are quite a few resources on the web about deflation, on which you will find examples of different kinds of 'deflation.' As some economists will point out, not all deflation is bad. For example, new technological innovations can increase productivity, which in turns lower prices of some items.

However, as for oil and deflation, as pointed out by others, the problem is the non-linearity of the effects of oil price.

For example, Scenario A (scenario B is at the end of this post): if oil prices were to suddenly double (which would easily occur, say, if there was a terrorist strike in Saudi Arabia against the oil fields), the rest of the prices of everything *would not* double. Rather, a cascading set of events would start, leading to signficant reduction in demand of many items.

In the case in the US (and the UK and some other countries) where housing prices have been escalating dramatically, and buyers are highly leveraged, an oil induced economic crisis will plummet demand for housing, thus the prices of houses which do sell will drop sharply from their recent high, and thus the market value of the average house will be well below the mortgage face value. At this point even the banks and other holders of assets become threatened. Homeowners will not be able to sell because they will not be able to pay off the mortgate. It is a rather nasty spiral to enter.

Where I am at, in Japan, the government, banks, and real estate owners having been walking on a knife edge for some time, and will probably continue to do so for the rest of my lifetime, due to the fact that fewer people -> less demand -> continued downward pressure on realestate. The self-feeding cycle of deflationary scenarios are scary to business and government alike.

The additional problem poised by PO is that when economic growth is attempted to be restarted, the limitation will then be the non-availability of the required energy supply. Thus, any economy will not be able to grow sufficiently to make up for the loss of the depressed times. Without viable alternative energy sources, the future holds a continuing Dante-esque spiral of economic doom - a never ending depression (well, until Monte's die off scenarios have finished their work....)

As for your investments, there are many, many advisors who can tell you better than I. If you really are a PO doomer, then you should take the advice of those gold bugs who are the more reasonable of the set. One source often cited on this forum is the FinancialSense webpage.

SCENARIO B: Take the more optimistic approach. Let's say that PO is around 2025 or 2030. However, to expand oil supply for that to happen will cost greatly (exploration etc.) So, on average let's say oil will go up $5/year per barrel. $60 this year, $65 next, etc. In this scenario you will see risks first of inflation (e.g., all those semi-truck drivers having to pass along the price of diesel), then you will see hyper-inflation (as governments try to pay off their debts with cheaper and cheaper money), then finally depression as businesses disappear and people lose their jobs. Not a particularly rosy scenario either, but it takes longer to get there than Scenario A.

Of course the best of all worlds would be where oil could just be steady (in price, in availability), then as an economic driver it would just be a non-event. But no one expects that to happen, even the most optimisitic among us.

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Re: Inflation or Deflation?

Unread postby shakespear1 » Sat 13 Aug 2005, 05:25:38

freetoken

Is it true that morgages in Japan are multi generational ( beyound 30 -60 yrs )?

Curious. :-D
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Re: Inflation or Deflation?

Unread postby freetoken » Sat 13 Aug 2005, 06:59:09

$this->bbcode_second_pass_quote('shakespear1', 'f')reetoken

Is it true that morgages in Japan are multi generational ( beyound 30 -60 yrs )?

Curious. :-D


I've not shopped for a mortgage here (nor do I plan to, I will rent until I leave), but I seem to remember seeing on a flier, from a builder advertising their construction, loans up to 40 years were available.

In my area there has been quite a bit of construction lately, or should I say reconstruction, as older buildings are being tore down and replaced with new (residential and commercial.) So I get a sales flier stuck in my door quite often. I'll try to remember looking next time and check what they are saying about loans.

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Inflation, Deflation or new Inverse Inflation?

Unread postby Dukat_Reloaded » Tue 23 Aug 2005, 05:10:27

With the current account deficit of the United States of America, I think alot of assets will be inflated away. I was thinking the other day how should one begin getting their affairs in order?

Method 1
Pay off all debt and save.

Method 2
Buy more assets and get into more debt.

Method 1 would work well in an deflationary environment but I find that very unlikely and if hyperinflation took route, it would have been more prudent to have more debt.

Method 2 is risky but could be well worth it. I find a hyperinflation environment much more likely for the USA. With the large amount of foreign debt it would be impossible for the USA to try to protect their currency from inflation. In a deflationary environment, all the homeowners would find it impossible to get out of debt, and the few americans and the large foreign dollar holders hands would increase in value. Deflation would allow the foreign holders of the money to basicly takeover america. I very much doubt that the government would allow that so they will hyperinflate the currency to get rid of foreign debt and reduce the amount of home debt making it easier for their citizens to pay off their loans. I can really see no other way for the usa out of this.

Those are two likely senarios with the latter being more likely. Now the problem which may arise with method 2 is in hyperinflation the value of properties will go up. Ok hold for a minute, what if only certian asset classes increased in value, whereas others decreased in value. For example, a house worth 500k is deflated to 10k but food and oil is inflated to $10 for an egg & $40 for a loaf of bread because of demand. People want food not houses. So in this inverted inflationary environment, people still can not afford the basics of living because wages did not rise and still will not beable to pay off personal debts even with hyperinflated money. So the value of the things people need like food will go up high, and property is no good when you can only afford 2 loafs of bread for a weeks wage so property would go down to almost worthless status. Just think how in some 3rd world countries, you can buy property with a house for just afew US dollars. Perhaps property maybe be exchanged for food at some point?

See if you choose method 1 or 2 you would be screwed. One way to protect yourself is to buy Foreign Currencies or Gold. See Gold should allways have the same purchasing power and not change much throughout time. Assuming you have a 1/10th oz gold coin, thats worth bout $45US dollars, in a hyperinflationary enviroment it should enable you purchase 30-40 loafs without having to work hard like everyone else all week just to afford food.

Dukat
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Re: Inflation, Deflation or new Inverse Inflation?

Unread postby Falconoffury » Tue 23 Aug 2005, 05:33:43

It would not be a bad idea to get out of debt and buy precious metals to physically hold and defend in your home. Also, food rations would not be a bad idea.
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Re: Inflation, Deflation or new Inverse Inflation?

Unread postby marko » Tue 23 Aug 2005, 11:25:26

I think that the most likely scenario is that we will have a period of fairly severe deflation, followed by hyperinflation. For my most recent thoughts on this, see this forum:

http://www.peakoil.com/fortopic11556.html

For this reason, I have paid off my debts and have been saving assiduously. I do not own real estate, because I think that prices will drop. (Also I can't afford to buy now without taking a mortgage. In a severe deflationary recession, I would likely face foreclosure.)

I have put some of my money into gold as a fallback in case we go straight into hyperinflation, but I have put most of it into foreign currencies and short-term dollar-denominated securities that offer a decent yield.
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High oil prices might cause deflation, not inflation

Unread postby Starvid » Tue 31 Jan 2006, 21:57:19

At least according to Reuters

$this->bbcode_second_pass_quote('Reuters', 'L')ONDON (Reuters) - Oil prices are rising again, but the threat to global investments is not what you might think -- deflation of the global economy rather than inflation of consumer prices.

Investors are generally calm about the prospect of spiking crude prices working their way into broad-based inflation and expect interest rates to stay low as a result.

They worry rather that higher prices will drag on economic growth and weaken company profits, in effect deflating relatively robust global economic performance.
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