[MonteQuest]

The United States is flirting with a low-grade depression, (deflation) one that may last for years. The meaning of deflation is that assets of almost every kind, from financial investments and real estate to manufactured goods and commodities, will be revalued downward correcting for the falsely optimistic asset valuations achieved during the easy credit years. The real risk lies more in stagflation than deflation. Stagflation is a term that originated in the early 1970s to identify the simultaneous occurrence of recession and inflation. When both occur at once, fiscal and money managers are at a loss concerning what to do next. The great difficulty for policy-makers is that this doesn't much feel like a crisis--not yet anyway, for most Americans. So where's the urgency to undertake radical remedies? Nobody knows what will unfold if nothing is done, but the consequences of waiting to find out could be horrendous for the broad ranks of Americans.

Basically, what's under way is a brutal unwinding of the delusional optimism like that which reigned during the dot.com bubble; excesses like the hyperinflation in financial assets and the swollen ambitions that led investors and companies to wildly overvalue their prospects and their stocks for future returns. Now, we have the real estate bubble which will burst when long term interest rates rise or when the unemployment rate is so high that it impairs household marketability.

China, given its burgeoning low-wage output, is now the world's main deflationary engine. Prices and wages have to come down if we are to compete. What I find most remarkable, is that there is no debate on these momentous matters. Seems the strongest thing the US government is doing is asking China to float its currency, which, by many estimates, is under-valued 40%.

From all outward appearances, it appears that the Federal Reserve is deliberately inducing price inflation to counter the deflationary forces, while fudging the CPI and inflation numbers. Rising prices will automatically ease the debt burdens of borrowers by diluting money's real value (that's why creditors always adamantly oppose inflation). In a perverse way, peak-oil is a god-send. If you intend to jump-start an $11 trillion economy, you have to print a bunch of debt money. The US government has a technology, called a printing press that allows it to produce as many US dollars as it wishes at essentially no cost. We have not finished paying the consequences of our international monetary system based on fiat money. If things deteriorate further, who knows, the government's deficits may have to grow twice as large to become effective therapy. While the political climate is not yet ripe, forward-looking progressives should already be drawing up a grand list of spending projects--repairing the tattered infrastructure and launching innovative public investments that speak to the future, like--let's see--renewable energy! What a concept!

We are soon going to have to face up to some long-suppressed truths. Globalization, for instance, has been good for US multinationals but not for the balance sheet of the American economy. That is the meaning of the huge trade deficits, the accumulating indebtedness that inevitably will produce a painful reckoning in standards of living. We cannot continue to consume more than we produce by borrowing every year from abroad. 80% of the world's savings are tied up in the US debt. If China can produce US quality products for Wal-Mart at an average of $.64/ hour, how can we ever hope to compete? I'll tell you how--by being willing to work for the same wage here. Gulp! We did it to ourselves, you know. We exported our American know-how and our factories to the developing countries. You reap what you sow. Many wish to blame the multi-nationals, but how could they continue to survive if they did not? "Buy American" was a short-lived bumper sticker. The globalized system the United States launched and protected throughout the cold war decades approaches its own reckoning with the dilemma of too many factories and not enough buyers -- and the buyers the world has--us--are doing it all on credit.

The gathering evidence also suggests that the mass-consumption economy that has flourished since World War II may at last be running out of gas--literally. Too many indebted consumers are tapped out or will be in hard times. The savings rate is down to .2%. No rebound ability there, I am afraid. Who's going to buy all this stuff? Who's going to continue to lend us the money? To end on a positive note, maybe this is the long-awaited "market signal" for us to start investing in the "problems" the country has long neglected. It's time to invest in the energy technologies and industrial transformations required for the post hydrocarbons age of an ecologically sustainable prosperity. Food for thought, any way.

[Oilgood]

MonteQuest, could you please clear something up for me:

My understanding of the co-dependent relationship between China's economy and the US economy is basically:

China says to America: "Here, borrow some more money from us, and then use the borrowed money to buy the goods we produce."
US: "Sounds good!"

Is this a correct assessment? Is there more to it than that?

I've heard all the usual anti-globalization arguements before, but I've never explicitly come across the one about massive foreign debt a la the USA. Thanks for bringing it to our attention- unlike most economic arguements, this one appears to be based on reality, not theory and normative speculation.

[MonteQuest]

$this->bbcode_second_pass_quote('Oilgood', 'M')onteQuest, could you please clear something up for me:

My understanding of the co-dependent relationship between China's economy and the US economy is basically:

China says to America: "Here, borrow some more money from us, and then use the borrowed money to buy the goods we produce."
US: "Sounds good!"

Is this a correct assessment? Is there more to it than that?

[OilsNotWell]

Thanks for the insightful post, MQ.

Could you help me understand how the yuan at its current fixed rate plays into this?

Why would it suddenly appreciate against the dollar by 40%?

Will China unpeg the yuan? The US seems to be crowing about it more and more. Can the US really even force China to do so, since all they would have to do is stop buying our debt, turn those dollars into hard assets (like they seem to be doing), and/or sell dollars to mount a not-so-subtle speculative attack on the dollar...They are our banker, so to speak... but they need us to buy their goods, too...Could they also print more yuan to maintain their trade advantage (devaluing their currency against the dollar) if it was unpegged?

Also consider this: If you owe the bank a little money and can't pay, you have a problem...If you owe the bank a ton of money and can't pay, then the bank has a problem. But add to this, too, what if you could pay "the bank" all the money you owe because you just printed a fresh batch of dollars? It does seem to make sense that we can print all the dollars we want, it just won't have as much value per dollar..

What mind-numbing things these are! No wonder no one but central bankers and multinationals and ultra wealthy seem to care about it...until the rest of the folks realize that they're gettting squeezed either by real-value falling wages and/or rising prices.

How does the US get around its' debt without monetization? The Fed looks to be in quite a bind since if they continue to raise rates in the face of a "slowdown" it will be negatively received.. But their other weapon, monetization, fans the flame of, and is truly the cause of, inflation and currency devaluation... Will rising commodity prices be their patsy doing its' dirty (inflation) work?

I see the Fed reacting to any possible liquidity crises by further monetization...fueling devaluation and stoking inflation. In an environment of stagnant or falling real-value wages and income, this is a big problem. I don't see what the Fed would do in such a situation either.

I've also agreed with the hypothesis that rising commodity prices, including and especially oil, are basically reflecting (or is the cause or effect of?) the dollar devaluation as producer and consumer countries alike need dollars to trade them... For example, if Saudi must trade oil in dollars, and that dollar they receive for the oil buys less, they would want to at least receive more (but worth less than before) dollars for that oil.. Same thing for consuming countries, such as China, if they must hold dollars or dollar-denominated assets, they should expect to pay more dollars for the same amount of oil, but maybe in their real terms, the value of the oil stayed the same, it just cost more "dollars" to get it... Also note that rising oil "cost" seems to have paralled the fall in the dollar in the last three years...

Add oil depletion into the picture, and the outlook looks worse. Lack of spare capacity, security concerns, war, limited supply growth, "unforeseen" demand growth fuel the fire even more.

In the good 'ole days, rising oil prices could be squashed by having a certain key producer open up the taps.. But no more it seems.. Now the only limiter on prices, from an economist's point of view (and remember they are still in charge) may be demand curtailment... Demand destruction, that is...the Fed just whistling while prices rise high enough a slowdown occurs (that means people lose jobs!).. and not actually make a meaningful effort to lower prices...

I find it interesting that the Fed or the adminstration seems not "too" concerned about oil prices...do they know it needs to happen to destroy demand and then provide the ready cash to ensure the wheels are greased? If they view oil price rise as temporary, then why do so many say high prices are here to stay? Is it that the price rise will be temporary because maybe soon if will become too expensive to afford and create the massive changes that need to occur in a rapid period of time that would be unable to occur because of the political impalability such measures would create if put in place pro-actively?

[OilsNotWell]

A few times some have posted a chart on the value of oil in real value terms... one had a oil/gold time value chart that was helpful...Maybe it was Financial Sense or FTW...

Anyway, sometimes I think of oil, like gold, as an international currency of exchange...It retains its' value essentially the same, but the relationship to fiat money changes with that reference value...So if we are pricing oil in dollars, and dollars are worth less (that's "worth less", not "worthless", not yet anyway), then the price must rise.

The only thing is, we need and use oil. We don't "need" gold. But gold is expected to rise in value in the future (contango futures market) while oil is expected to fall (backwardation). With contango, you'll see producers withhold inventories (just read about a gold producer today who's keeping 1/3 of their production to sell for a higher price later). If we start to see producers find reasons to withhold production, watch out! I honestly think in the near term future such oil withholding, if it occurs, and supplies were desperately thing, this would be considered an act of war... So imagine if Venezuela just happens to have a strike again (maybe engineered, maybe not)...for a long time...and the markets started going crazy, we'd see a possible military solution toot sweet, I'd imagine.. Look at Russia, and how nice their oil production recovery worked to their advantage...

It's the great game again...not that it ever ended, really. Major players are US, Russia, China, UK, Western Europe with non-Sino Asia, the Middle East, Africa, all playing key parts..

[MonteQuest]

Currencies are constantly changing in purchasing power. When they are allowed to float against other currencies, they find their own level as opposed to being pegged to one, as is the current case with the renimbi (yuan). If allowed to float , it would, by most accounts rise about 40%. Why? Look at China, it is growing like gang busters! Almost 10% growth. It is the world's producer of goods. China has pegged the value of the yuan to the U.S. dollar by buying or selling dollars since 1995. The obvious sign of the undervaluation of the yuan is China's swelling national accounts. The country's dramatic success in export markets has made it a magnet for foreign currency. Freeing the exchange rate would almost certainly result in an influx of speculative "hot money" that helped cause the pan-Asian financial crisis of 1997-98.

[MonteQuest]

$this->bbcode_second_pass_quote('', 'W')ill China unpeg the yuan?

[OilsNotWell]

$this->bbcode_second_pass_quote('', 'A')nd yes, OPEC will want more for their oil, maybe a good time to switch to the euro? We don't have anything they want to buy anyway with their dollars. Stand by for news!

[MrBean]

$this->bbcode_second_pass_quote('MonteQuest', 'C')urrencies are constantly changing in purchasing power. When they are allowed to float against other currencies, they find their own level as opposed to being pegged to one, as is the current case with the renimbi (yuan). If allowed to float , it would, by most accounts rise about 40%. Why? Look at China, it is growing like gang busters! Almost 10% growth. It is the world's producer of goods. China has pegged the value of the yuan to the U.S. dollar by buying or selling dollars since 1995. The obvious sign of the undervaluation of the yuan is China's swelling national accounts. The country's dramatic success in export markets has made it a magnet for foreign currency. Freeing the exchange rate would almost certainly result in an influx of speculative "hot money" that helped cause the pan-Asian financial crisis of 1997-98.

[MonteQuest]

$this->bbcode_second_pass_quote('MrBean', ' ')
...unless some ASEAN common currency structure is created, in imitation of European single currency. Any news on that front, BTW?

[MonteQuest]

As I predicted, here is the first call for the return of stagflation:

The New Stagflation

$this->bbcode_second_pass_quote('', 'N')ext year's economic difficulties are already on the horizon. Growth is slowing as the housing market cools and consumers rein in their spending. Inflation is rising a bit, driven mainly by oil prices, health care costs, and corporate price increases, fueling a spectacular recent profit surge. Job creation is weak, and wages are flat. This is the new stagflation – an unpleasant reminder of the economic cost of unilateral war.

[smiley]

Just a few quick comments on China

$this->bbcode_second_pass_quote('', '')$this->bbcode_second_pass_quote('', 'W')ill China unpeg the yuan?

[MonteQuest]

The Return of STAGFLATION
http://www.gold-eagle.com/editorials_00 ... 23000.html

Here's a great resource for info on the Oil Crisis:

$this->bbcode_second_pass_quote('', 'O')il prices shocks have a stagflationary effect on the macroeconomy of an oil importing country: they slow down the rate of growth (and may even reduce the level of output – i.e. cause a recession) and they lead to an increase in the price level and potentially an increase in the inflation rate. An oil price hike acts like a tax on consumption and, for a net oil importer like the United States, the benefits of the tax go to major oil producers rather than the U.S. government.

[MonteQuest]

Since it looks like "stagflation" is rearing its ugly head, I though I would bump this thread up and refresh everyone on where this leads.

The Recovery That Isn't & The Bust That Will

[quote]I submit to you, dear reader, that most everything you’ve heard about the economic recovery is a pack of lies, a fraud, a joke, propaganda, twaddle and fiddle-faddle, sprinkled with a liberal dose of bullpucky and a pinch of hogwash for good measure.

Now that we’ve gotten the niceties and formalities out of the way, let me share with you how I REALLY feel.

Most readers already know that the official statistics are a pile of hooey, routinely manipulated to demonstrate an economic fantasy that doesn’t really exist. Basically the feds get to write their own report card every month and they’re not exactly loathe to take some liberties in compiling the numbers. (If there’s one thing feds are good at, it’s TAKING liberties.) We’ve been over this before, but let’s review a few blatant examples to lay the foundation.

First off, one of the biggest frauds: GDP. This fabrication is calculated using all manner of mumbo jumbo that I purport neither to care about nor understand. AND the official inflation data. Anyone who doesn’t sleep under a bridge and force windshield washings upon unsuspecting drivers for a living knows that official inflation data is about as out of touch with reality as Rosie O’Donnell is out of touch with the concept of stopping at just one helping. We all know that the inflation figures are routinely UNDERstated, which leads to an OVERstatement of GDP growth.

The inflation data makes ridiculous assumptions about housing costs. Those numbers are calculated utilizing rental rates and as we all know, rental rates have NOT kept pace with surging home prices. As far as the Fed is concerned, the cost of housing has only risen modestly even as they pat themselves on the back for surging home values. You can’t really reconcile the dual “successesâ€

[threadbear]

Monte Quest, Deflation? How so? Prices lower to meet what people can afford? How about prices keep inching upward as the dollar weakens against other currencies, making imports more expensive, regardless of what people can afford.

If only 20% of the population can afford to take part in the traditional economy, that's okay. Corporations don't need the bother of catering to the great unwashed anyway. Walmart will be for the few remaining in the middle class and the upper class. Everyone else will be shopping on ebay, garage saling, thrift stores, etc... and buying something brand new, once in a while, not often, like today.

If you look at how Buscho is positioning US economy right now, it's as if he doesn't give a rat's a** about price inflation. He's creating a fortress America, will bring industry and manufacturing back home, but seek to control oil and guns internationally.

I remember when I was a kid, before the age of cheap imports. Housing was cheap, noone even knew about the stock market, it was so irrelevent, and everything else was really expensive. It'll look like that, but more so.

Asset bubbles will pop because there will be no pricing power in the rest of the economy. Housing and stock market are the only sectors with any slack.

[MonteQuest]

$this->bbcode_second_pass_quote('threadbear', 'M')onte Quest, Deflation? How so? Prices lower to meet what people can afford? How about prices keep inching upward as the dollar weakens against other currencies, making imports more expensive, regardless of what people can afford.

[threadbear]

Agree about the assets, but manufactured goods and commodities? Nope, don't think so---perhaps against gold, but not agains the American dollar.

[MonteQuest]

$this->bbcode_second_pass_quote('threadbear', 'A')gree about the assets, but manufactured goods and commodities? Nope, don't think so---perhaps against gold, but not agains the American dollar.

[threadbear]

Monte, Ooops. I jumped to conclusions when I saw the "D" word....Your anlaysis turns out to be stunningly thorough, why, brilliant even.

[MonteQuest]

$this->bbcode_second_pass_quote('threadbear', 'M')onte, Ooops. I jumped to conclusions when I saw the "D" word....Your anlaysis turns out to be stunningly thorough, why, brilliant even.