[ColossalContrarian]

The inflation/deflation debate has been going on for awhile now and it appears that most people here see an inflationary or hyper inflationary future ahead for the US.

My Questions:

The Fed can keep pumping the markets with more and more 1's and 0's, but those aren't real dollars like the ones we have in our wallets right?

Which begs the question, what is the ratio between “byte dollars” and real dollars?

Could this be deflationary for real dollars? Could there be a scenario where real dollars decouple from “byte dollars”?

[DantesPeak]

The US Treasury was given the power to issue money, which had to be backed by gold and/or silver. The US Treasury can not issue fiat money. However the Fed was later given the power (100 years ago) to issue Federal Reserve Notes, a kind of fiat money, which was at first backed by gold, later by US government debt, and now by "mortgage related instruments" of dubious and uncertain value. There is about $800 billion or so of paper money issued by the Fed, and the Treasury has basically withdrawn all of its paper money from circulation.

How far we have come.

Anyway, all other trllions of 'dollars' that exist in book entry or electronic form are based upon the 'value' of the paper money issued by the Fed.

The early 1930s deflation was based upon the Treasury/Fed dollars being withdrawn from banks due to poor economic conditions - and therefore book entry dollars had to be converted to paper money, and paper money to gold/silver. This caused quite a misfunction, and the US afterward stopped issuing Treasury money and further delinked gold from all dollars.

I suppose that deflation is possible if money could be converted into something else like gold/silver. But since it can't, I think monetary deflation is not only almost impossible, but the US dollar will eventually be destroyed in value by hyperinflation, or a long period of inflation.

[DantesPeak]

$this->bbcode_second_pass_quote('pstarr', 'I')sn't that what we can expect in the future for the entire world? The worst of all possible worlds--depreciation of income and savings, and a reduction in production and employment?

[mmasters]

$this->bbcode_second_pass_quote('pstarr', 'T')he 1970's were characterized by stagflation, a combination of monetary inflation and and economic stagnation perhaps a result of US oil peak.

Isn't that what we can expect in the future for the entire world? The worst of all possible worlds--depreciation of income and savings, and a reduction in production and employment?

[vision-master]

TS-Will-Start-HTF by 2009.............

[evilgenius]

Deflation is the only thing that you will see. It will be masked by higher energy (because of peak oil) and food (because of the impact of peak oil) prices, but it will be the driving force. To put it simply deflation is what you get when the demand side of the equation goes away because there are so many fewer dollars available to chase after things. When this happens prices have to lower or no sales will be made. The equilibrium price will come down for everything except food and energy. Yes, higher food and energy prices will only serve to exacerbate this.

Oh, yeah, the dollar will gain in value and gold will plummet too. No, gold won't fall below what it costs for the largest producers to mine it, but it will fall. Yes, if you own gold you will probably see it go back up again, in a number of years. If you are a goldbug and you don't panic you will probably be okay. Just think twice before you put everything into a single investment.

[DantesPeak]

$this->bbcode_second_pass_quote('evilgenius', ' ')To put it simply deflation is what you get when the demand side of the equation goes away because there are so many fewer dollars available to chase after things.

[evilgenius]

Fewer dollars, Dante, because of first the loss of the ability to borrow those dollars as a means to enter them into the economy by means of the housing ATM and secondly by means of job losses. Once it gets going it will be a wonder to behold.

[bodigami]

$this->bbcode_second_pass_quote('vision-master', 'T')S-Will-Start-HTF by 2009.............

[ColossalContrarian]

I guess I was thinking about this on a more micro level. Like when the ATM's stopped working last summer for my bank WellsFargo. It was only for a day or so but if this type of a scenario were to go on for any extended period of time, maybe multiple days or even weeks. While banks reorganize and eat at each other, I will be unable to use my ATM card AND unable to write checks unless I can find someone foolish enough to accept checks.

Maybe my question would be better put; if big banks and the financial world are in chaos for a period of time, do you think my local grocery store would accept dollars because anything else (debit, credit, checks) couldn't be used? The dollors are have in my wallet at that time is really the only money I have until the financial system gets rolling again.

It seems to me that at that point, dollars would be very valuable or they'd have the same value they had before only there would be a lot less of them on the street for people to use to by goods and services.

[threadbear]

$this->bbcode_second_pass_quote('evilgenius', 'D')eflation is the only thing that you will see. It will be masked by higher energy (because of peak oil) and food (because of the impact of peak oil) prices, but it will be the driving force. To put it simply deflation is what you get when the demand side of the equation goes away because there are so many fewer dollars available to chase after things. When this happens prices have to lower or no sales will be made. The equilibrium price will come down for everything except food and energy. Yes, higher food and energy prices will only serve to exacerbate this.

Oh, yeah, the dollar will gain in value and gold will plummet too. No, gold won't fall below what it costs for the largest producers to mine it, but it will fall. Yes, if you own gold you will probably see it go back up again, in a number of years. If you are a goldbug and you don't panic you will probably be okay. Just think twice before you put everything into a single investment.

[pedalling_faster]

you'll see both. if you can live on computers and software development tools, your costs are going down.

i imagine used couches on Craigslist will be cheaper. stuff that people sell when they lose their jobs, buyer's market.

food & energy, well, you know. prices going up.

as far as the stock market, we don't know the comprehensive details of how it is manipulated, or i don't. just the acknowledgment that there is something like the Working Assets Market Group (something like that) with the informal name, Plunge Protection Team.

if prices and the market mood are propped up by whoever-whatever, it gives people something to hang on to as real economic activity contracts.

[DantesPeak]

$this->bbcode_second_pass_quote('ColossalContrarian', 'I') guess I was thinking about this on a more micro level. Like when the ATM's stopped working last summer for my bank WellsFargo. It was only for a day or so but if this type of a scenario were to go on for any extended period of time, maybe multiple days or even weeks. While banks reorganize and eat at each other, I will be unable to use my ATM card AND unable to write checks unless I can find someone foolish enough to accept checks.
Maybe my question would be better put; if big banks and the financial world are in chaos for a period of time, do you think my local grocery store would accept dollars because anything else (debit, credit, checks) couldn't be used? The dollors are have in my wallet at that time is really the only money I have until the financial system gets rolling again.

[Fiddlerdave]

$this->bbcode_second_pass_quote('evilgenius', 'F')ewer dollars, Dante, because of first the loss of the ability to borrow those dollars as a means to enter them into the economy by means of the housing ATM and secondly by means of job losses. Once it gets going it will be a wonder to behold.

[threadbear]

$this->bbcode_second_pass_quote('DantesPeak', 'G')o ask someone in Zimbabwe how much money they have in the bank, yet there is still hyperinflation.

[mmasters]

$this->bbcode_second_pass_quote('evilgenius', 'F')ewer dollars, Dante, because of first the loss of the ability to borrow those dollars as a means to enter them into the economy by means of the housing ATM and secondly by means of job losses. Once it gets going it will be a wonder to behold.

[DantesPeak]

I agree that economy is headed for some type of long term economic deflation, and I also agree that after the US dollar is dropped - or rather the Fed dollar is no longer exclusively used in the US - there may also be monetary deflation. But I don't expect anything like that soon.

[Falconoffury]

The deflation is not of currency, but of "real money". Since the currency is being distorted by inflation, you have to look at commodities with limited supply to measure "real money". Gold and oil are perfect examples. Real goods are stagnant or declining mainly because of peak oil. Inflation will only hold back the crash for a short time, by spreading the pain across anyone who holds or trades in the currency. Whether they force a hyper inflationary state or deflation is allowed to set in, it doesn't matter because we will have the same result. The flow of real goods will end.

Hyperinflation is pretty much guaranteed because the US dollar is still considered the world's reserve currency. All that would have to happen is a chain reaction of foreign reserve currency holders to flood global markets with dollars as they desperately leave the sinking ship. They will buy precious metals, land, other currencies, and pretty much anything but dollars. It's a matter of "when". A depreciating currency can only be a reserve currency for so long until the world decides that it would rather not go down with the ship.

[wisconsin_cur]

I don't know which thread to put this in...

it seems as if everyone is confused,

economist: deflation or inflation?

$this->bbcode_second_pass_quote('', 'T')he markets have become incredibly volatile as investors vacillate between these outcomes

The first two weeks of July were dark indeed, as investors feared that high oil prices were both heralding recession and preventing central banks from taking action by cutting interest rates. That environment was pretty bleak for risky assets, with equities falling and credit spreads rising. The repeated falls in the share prices of Fannie Mae and Freddie Mac added to the sense of crisis.

Two things then changed the tone. The first was a fall in the oil price from its $147-a-barrel peak. The second was the rescue of Fannie Mae and Freddie Mac and some better-than-expected results from the banking sector. The market's economic and financial worries were eased at the same time; equities rallied sharply (particularly bank stocks) and credit spreads narrowed again. The ten-year Treasury bond yield rose in a week from 3.83% to 4.15%.