Investment

» Jas_Jain - FWC: Inflation or Deflation? (Interview with Bud Conrad)

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I have pointed out to Bud that during the Great Depression FDR was able to create inflation at will by manipulating the price of gold in dollars almost like an amateur. After 2-3 years he came to the realization that it wasn't much help except for the fact that deflation was turned into inflation and it hurt as many, or more, than it helped. Deflation was the symptom and not the cause of the economic problems. As a matter of FACT, 1920s boom took place with deflation (with annualized deflation rate of 1.5% for the last three years of the boom)!

It will be lot harder to create inflation at will without the currency pegged to gold. If the USG were to announce that the dollar would be pegged to gold at $10,000 an ounce then it can easily fight deflation and create quite a bit of inflation.

The Fed has been fighting deflation for some 20 years. How? By facilitating the pushing of debt. That process has run into some problems. Inflation is a lagging indicator and has always fallen after few months of recession. We are witnessing the peaking of the CPI inflation rate in the US.

Bud, let us bet a bottle of wine. If CPI inflation goes above 5% for six months then you win and if it goes negative for six months then I win.

Jas
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http://www.safehaven.com/article-9910.htm

April 08, 2008
Inflation or Deflation?
by Louis James
An interview with Bud Conrad, Casey Research chief economist
The following interview, conducted by Louis James, a senior analyst and editor with Casey Research, appeared in the March 08' edition of Casey's International Speculator.
Louis James (LJ): The first question we think most readers will want to know about is this: if the U.S. is headed for recession - if not already sliding into one - do you really think we're facing more inflation in the near future, or could falling spending power cause deflation?
Bud Conrad (BC): There are strong deflationary pressures in a credit collapse because as housing prices drop and defaults rise, some of the ability to buy new items is lost. Traditional analysis suggests that we could have deflation such as that which occurred in the Great Depression in the U.S. in the late 1920s, early 1930s. I would point out, however, that in the Great Depression the dollar was linked to gold, limiting the amount of money printing that could be done, a limitation that does not exist today. In addition, with $100 oil it is hard to argue for deflation. My base prediction is that we are heading into an inflationary period.
LJ: If there was any doubt about inflation vs. deflation, has it been settled by the central banks of the world as they responded to last summer's credit crunch with greater liquidity?
BC: Yes. That is the point. The governments and their central banks have no limit on how much money they can create since there is no tie to gold or anything else. It is only logical to expect them to take the easy road and print money. The result is predictable. New government bailouts for whatever problems arise are going to continue.
LJ: With war spending, ballooning entitlements, a crisis of confidence in the U.S. financial system stewing, along with many other woes, do you think there's any chance that the U.S. will not try to inflate its way out of its current economic predicaments?
BC: In a word, no. Inflating its way out of problems has become the default solution for the U.S. government, and governments around the world. Consider, the price tag for the wars in Iraq and Afghanistan is now credibly estimated at $3 trillion. The economic stimulus package passed by the U.S. Congress will cost $150 billion, which will come on top of slowing tax receipts due to the recession, confirming that the U.S. budget deficit will jump to $400 to $500 billion this year.
That kind of deficit will put yet more pressure on the dollar due to the expectation that the government will inflate the dollars to pay for the deficits, as well as further bailouts that may be required as the credit crisis continues to unfold. And just over the horizon, it gets worse because of the unsustainable costs of the entitlements due to the 76 million baby boomers now beginning to look to retirement, and for their government medical payments.
As governments don't actually produce anything, paying for all of this will have to come either in the form of direct taxation, which has well-established limitations past which it becomes counter-productive, or from indirect taxation, in the form of a steady erosion in the value of the dollars that will be used to meet the government's many obligations. In other words, inflation.
LJ: There's a view among many observers that U.S. trading partners will have to devalue/inflate their own currencies, or their own economies will be slammed by a loss of competitiveness of their products in U.S. markets. This could spill over to those countries that supply raw materials or labor to the first tier of dominos. Do you think such a "race to the bottom" is likely? Our survey finds almost universal inflation around the world, and it seems to be accelerating in most places. Is the race happening already?
BC: Again, yes. The Asian exporters want to expand trade to keep their workers employed, and are trying to accomplish that goal by supporting the dollar with unwise, outsized investments in dollar-denominated investments like Treasuries. As a result, our foreign trading partners have accumulated $6 trillion of such assets, an unprecedented level of holdings.
This circular investment strategy - in which we buy from foreigners and they reinvest in our government paper - has provided the capital for the U.S. economy that our domestic saving has not been able to provide. In the process, it has kept a lid on consumer prices here in the U.S. for over a decade, essentially exporting inflation offshore, along with our manufacturing. But the net result is that the U.S. has done the equivalent of selling off about 23% of its tangible net worth to foreigners, leaving the system at risk of collapsing.
If there is a positive, it is that we have an environment that evokes memories of the long-standing military strategy of Mutually Assured Destruction, where no one wants to be the cause of collapse. The Chinese have pegged their renminbi to the dollar rather than let it rise, and that has fostered inflation that is over 6%. The Persian Gulf oil states that peg their currencies to the dollar suffer the weakness of the dollar, causing higher internal inflation.
The world money supply is growing faster than the production of "stuff," resulting inevitably in less purchasing power for all currencies. How much longer this is sustainable is hard to say, but the odds increase every day that foreign holders of dollars will come to believe that the U.S. government is willing to sacrifice the dollar, and then they will begin to unload dollars in earnest. There are signs of this happening already, with the Chinese and others using their considerable dollar reserves to buy up large natural resource deposits, even shares in U.S. corporations. In other words, tangible items.
LJ: What other factors do you think might mitigate or exacerbate inflation worldwide? Do you think the overall trend will be for increasing inflation that will continue for some time, or are there mitigating factors that might slow it?
BC: The slowing of world economies we expect in the mid-term may somewhat mitigate inflationary pressures. However, as we also expect governments to react as they always do when faced with an economic downturn - namely attempting to stimulate growth through further monetary creation - this will only plant the seeds of much higher inflation over the next decade.
LJ: Do you think robust economies like China's can handle whatever inflation is likely ahead without too much trouble - or is this a serious worldwide storm that's brewing?
BC: The storm is worldwide. China depends on Western countries to buy its exports and there will be convulsion from overcapacity in an economic slowing. They are not immune to U.S. slowing. The Shanghai stock market that went from 1,000 to 6,000 has already pulled back to 5,000 with some anticipation of further slowing. The world is not decoupled; it is even more coupled than ever. But on an inflationary view, China has strengths, most importantly goods that the world wants to buy, and that results in a trade surplus.
LJ: Can you think of any countries insulated enough from the spreading loss of value that it makes their currencies safer places to put cash? Switzerland?
BC: I look to the countries that are rich in natural resources to maintain an edge because of the commodity boom. Russia is not a safe country from an investment perspective, but their oil has given them a completely new life. Canada has benefited greatly from the natural resource boom and should continue to do so.
LJ: It's clear from the research you've done that the advent of a pure fiat monetary system in the early 1970's has triggered a significant increase in monetary inflation, but why hasn't that caused a greater level of price inflation than we have seen in recent decades?
BC: Well, we have seen it, but most people don't seem to realize it. The U.S. dollar has lost 81% of its value since 1971. Bad as that is, it would have been much worse, if not for the Chinese and others buying our treasuries. That, in effect, funded our deficit spending and exported our inflation to their shores. Look at the inflation in China: it's headed higher. Their purchasing our government and corporate debt was like a vendor financing program for the sale of their exports to us. In effect, they loaned us the money to buy their goods.
We haven't faced the ominous task of paying off what is equivalent to a maxed-out credit card; and when we do, it could spell disaster for the dollar. We have imported Asia's computers, TVs and clothes, produced with their cheap labor, keeping our price indexes lower. The bubbles of foreign investment capital went into the pool of financial assets supporting our stock markets and housing markets, which certainly had big price inflation, but which are not included in the common price measures of our inflation like our Consumer Price Index. Just applying the methods used in 1980 for the CPI, before the government adjusted the statistics, would suggest that the dollar of 1971 is worth about 7 cents today.
The Chinese and Japanese have actively supported the dollar to maintain their exports, but should world dollar holders reverse course, a floodgate of even worse inflation could come from too many foreign holders all wanting to exit the dollar at the same time. That almost happened in August 2007. They stepped back from the potential melt-down, but it's still not safely removed from our future.
The process is on the track for even more price inflation in the future, because more people will be waking up to the sham of tissue paper money.
LJ: General loss of value among fiat currencies is obviously good for the price of gold and the kind of investments we have been recommending here at Casey Research. Do you have any other suggestions for investors who believe that inflation of major world currencies is "baked in the cake"?
BC: Watch out for agriculture price rises. A situation you might call Peak Food is developing. We have the lowest supplies of grains ever compared to usage. The prices of wheat, corn, soybeans and rice are all double from what they were a year ago. Dangers of energy shortages leading to food shortage are growing daily and are not widely enough understood. Rising food prices will be important additional drivers of inflation across the planet this year.
LJ: May we ask what you're doing with the cash in your own portfolio?
BC: I am, not surprisingly, overweight in precious metals.
LJ: Any final comments?
BC: I usually confine my analysis to economic measures, but the world political situation is extremely important and intertwined with the economic consequences. As we look at Asian ascendance, and their expanding importance on the world scene, we should be aware of the dependencies of their claims on our assets.
Similarly, the competition for resources is likely to continue, and the worries over peak oil probably have much to do with our presence in the Middle East. How these unravel is a bigger discussion than we have time for here, but I urge watching the international landscape almost as much as our own internal actions, as the outside forces will direct our future as much as the decisions at home.

-- posted by Jas_Jain

» permabear - FWC: Inflation or Deflation? (Interview with Bud Conrad)

In response to FWC: Inflation or Deflation? (Interview with Bud Conrad) posted by Jas_Jain:

Jas,

All the trends of the past couple years have favored inflation. Oil, gold, other commodities going through the roof. Mr. deflation, Robert Prechter, has been predicting the exact opposite trend for many years. And he's been dead wrong. The factor that will most create inflation is the slow decimation of the dollar. Trade deficits, budget deficits, over consumption and lack of savings all are contributing to the dollar decline. And then there is Ben Bernanke, the ultimate inflation hawk who has said he will use whatever means are necessary to defeat it. I'm sticking with Bud Conrad and the inflation scenario.

-- posted by permabear

» Jas_Jain - Re: FWC: Inflation or Deflation? (Interview with Bud Conrad)

In response to FWC: Inflation or Deflation? (Interview with Bud Conrad) posted by permabear:

Hello Perma,

Inflation/deflation debate is like a religious debate.

Q1: How much has dollar already fallen over the last 5-6 years and how much cumulative inflation have we had in the US over the same period?

Q2: Do you have knowledge of what happens to inflation rate after the economy has been in a recession 4-6 months?

Q3: Do you think we would have mild recession, or severe recession, or depression?

Q4: Do you believe in phenomenon known as demand "destruction?" (A 5% decline in demand is very bad for prices in most areas).

Jas

-- posted by Jas_Jain

» Jas_Jain - Expanded Q List -- Re: FWC: Inflation or Deflation?

In response to Re: FWC: Inflation or Deflation? (Interview with Bud Conrad) posted by Jas_Jain:

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Q1: Why do you think that "the trends of the past couple years" will continue?

Q2: How much has dollar already fallen over the last 5-6 years and how much cumulative inflation have we had in the US over the same period?

Q3: Do you have knowledge of what happens to inflation rate after the economy has been in a recession 4-6 months?

Q4: Do you think we would have mild recession, or severe recession, or depression?

Q5: Do you believe in phenomenon known as demand "destruction"? (A 5% decline in demand is very bad for prices in most areas).

Q6: Are inflationists smarter than the US Treasury market? Is Bill Gross smarter than the bond market (he raised his 3.0-4.5% range on 10-Year to 4.0-6.5% after it went above 4.5% for few months)?

Q7: When was the last time that 99% were right about economic forecasting? Especially, when was the last time that Wall Street's recommendation (to avoid US Treasury bonds for at least the last 5 years) was the correct call?

Q8: When was the last time that stocks fell, home prices fell, and Treasuries soared in the face of future inflation? (Long-term, stocks and real estate are the good hedges against future inflation and US Treasuries are bad investments in the face of rising inflation).

Jas

-- posted by Jas_Jain

» permabear - Expanded Q List -- Re: FWC: Inflation or Deflation?

In response to Expanded Q List -- Re: FWC: Inflation or Deflation? posted by Jas_Jain:

I don't have much time to respond, but I'll play your game.

Q1: Why do you think that "the trends of the past couple years" will continue?

Because the fundamentals support them. The U.S. trade deficit have declined only minimally since the dollar has been falling. As long as the U.S. is maintaining a massive current account deficit, as Morgan Stanley economist, Stephen Roach has obsessed on over the years, the dollar will be under pressure.

Q2: How much has dollar already fallen over the last 5-6 years and how much cumulative inflation have we had in the US over the same period?

Probably around 50 percent give or take. Do you of all people believe the government's inflation figures??? You should know better. The man on the street knows inflation is much higher than government reports it is. Plus the inflation trends are going up not down in the last year.

Q3: Do you have knowledge of what happens to inflation rate after the economy has been in a recession 4-6 months?

Yes this point supports your argument, at least when Ben Bernanke isn't in the picture.

Q4: Do you think we would have mild recession, or severe recession, or depression?

I'm with you on the severe recession, but I think Norm's predictions have validity in that the government is using all means necessary to delay the pain.

Q5: Do you believe in phenomenon known as demand "destruction"? (A 5% decline in demand is very bad for prices in most areas).

Again economic theory supports your argument, but again I bring back Ben Bernanke.

Q6: Are inflationists smarter than the US Treasury market? Is Bill Gross smarter than the bond market (he raised his 3.0-4.5% range on 10-Year to 4.0-6.5% after it went above 4.5% for few months)?

I think the treasury market has been responding to the credit crisis and using treasuries as a safe haven investment more than as an inflation hedge. This was a ridiculous argument Bob Brinker made on his show last weekend. That the 10 year treasury is predicting an inflation rate of a little over 2 percent. You may agree with Bob Brinker on this point, but I almost fell out of my chair.

Q7: When was the last time that 99% were right about economic forecasting? Especially, when was the last time that Wall Street's recommendation (to avoid US Treasury bonds for at least the last 5 years) was the correct call?

I don't know how to respond to this one. I've got a short position on the 30 year treasury bond, so I guess on this one point, I'm going with Wall Street.

Q8: When was the last time that stocks fell, home prices fell, and Treasuries soared in the face of future inflation? (Long-term, stocks and real estate are the good hedges against future inflation and US Treasuries are bad investments in the face of rising inflation).

When was the last time the U.S. was running $500 billion budget deficits and $600 billion trade deficits? Anyone hear of Zimbabwe or Weimar?

-- posted by permabear

» permabear - U.S. import prices rise 2.8 percent in March

http://www.foxbusiness.com/markets/indus...

Friday, Apr. 11 2008
U.S. Import Prices Jump 2.8% in March

FOXBusiness
U.S. import prices rose in March, due to oil costs and the largest rise in non-petroleum costs in history, figures that do not bode well for inflation.

Petroleum import prices are up by 9.1%, according to the Department of Labor. Import prices overall are up 14.8%, since 2007, making this the largest hike on record. Food and beverage import prices are up 2.5%, and the impact is likely to be seen as a rapid increase in food prices at grocery stores nation wide.

Import prices rose 2.8% from February, and food and beverage import prices are up 2.5%, after going unchanged in February. Non-petroleum import prices are up 3.6% after increasing 2.7% in February. Consumer goods prices rose by 0.5%, and automobile prices rose 0.5%.

Since February, import prices on goods from China have increased by 0.7%, while imports from Canada rose 3.2%. This rise in import prices gave the dollar a boost in early trading

Overall, prices have risen 7.9% in the year since March 2007.

-- posted by permabear

» permabear - John Williams on hyperinflationary depression

http://www.netcastdaily.com/broadcast/fs...

Radio broadcast of interview of John Williams of shadowgovernmentstatistics.com on hyperinflationary depression

-- posted by permabear

» Jas_Jain - Re: John Williams on hyperinflationary depression

In response to John Williams on hyperinflationary depression posted by permabear:

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Hyperinflation in America?

At least for the past 750 years there has been no case of sustained high inflation in Netherlands, UK, and America (the same economic system for the most part). There were periods of inflation and deflation, but never out-of-control inflation.

In addition to breeding economic and political dopes, wholesale, American propaganda machine also breeds its fair share of kooks. Hyper-inflationists are kooks and inflationists are dopes. No one can explain 4.25% rate on US 30-year bond and 3.5% on 10-year.

Restaurant prices have gone up LESS than the reported CPI. Restaurant costs reflect most areas of inflation, no? I had the best pizza that I like (Uncle Ernie's in SoCal) last week (went to visit friends in my old neighborhood). The prices are up 45% in 18 years! I like Porterhouse, Rib-eye and NY steaks and I have been able to buy them on sale, at least once a month, for $3.xx/lb for the past 20 years. Near-zero inflation in steaks for me. There are things that I consume that are lower in price, some flat, and some up. Overall, no more than 3% inflation for the past decade. Long-term, CPI does not understate inflation. Kooks have their own cooked up numbers.

Jas

-- posted by Jas_Jain

» permabear - Re: John Williams on hyperinflationary depression

In response to Re: John Williams on hyperinflationary depression posted by Jas_Jain:

Jas,

I guess I will have to join the long list of dopes in Jas' world view.

We undoubtedly agree on the nasty conditions that are developing. The housing meltdown is only in its early stages. The continuing housing meltdown will continue to feed credit problems throughout the financial system. The continuing credit problems will continue to feed economic contraction. The optimistic view perpetuated on financial media every day that we are closer to the end of the crisis than the beginning is full of beans.

It is true also that the treasuries are supporting your deflationist viewpoint. Treasury yields are at historical lows, indicating support for a weak economy and low inflation.

But all the other data points support the inflationist position. The Fed is taking historically unprecedented actions to reliquify the financial system. The dollar has been on a long-term trend downward and shows no signs of bottoming. Commodity prices continue to charge higher and are starting to infect other prices throughout the economy. Oil at over $110. Import prices up 14.8 percent in the last year. Inflation on a rising trajectory.

You and I both agree that the U.S. economy is in big trouble going forward. The only disagreement we have over how it will play out: inflation or deflation. My bet continues to be that Bernanke will have no choice but to choose inflation based on historical viewpoints. I believe that one day foreigners will stop pouring their hard earned trade surplus dollars into a losing investment in American treasuries. When that day comes, treasury prices will suddenly crash. That day will be the beginning of the end for the American economy and the day that inflation defeats deflation.

-- posted by permabear

» Jas_Jain - Re: John Williams on hyperinflationary depression

In response to Re: John Williams on hyperinflationary depression posted by permabear:

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"But all the other data points support the inflationist position."

I hope that Perma understands that my comments are not directed at him personally, but people who make similar claims time-and-again.

Most glaring example of economic dopes is not understanding and factoring in the LAGS in the economy and economic variables. All the bubble-meisters were pointing to employment growth during 2007Q4 to dismiss any recession threat.

Let me repeat, hopefully for the last time:

INFLATION RATE (HEADLINE) PEAKS 4-6 MONTHS INTO THE RECESSION AND THEN FALLS SHARPLY. WORSE THE RECESSION, LONGER THE INFLATION RATE WOULD KEEP FALLING.

Not a single inflationist dope has countered the inflation in restaurants as being a very good indicator of the actual inflation in the economy, long-term. I have a very good recollection of the common restaurant prices in NorCal (Bay Area) and SoCal (LA Area) and they are below the CPI rate. Shadow Statistics are for dopes and kooks. Beware of propagandists!

Jas

-- posted by Jas_Jain