I don't think Inflation will be a problem

[Hawkowl]

I don't think inflation, at least in the traditional meaning, is going to be a problem in this Great Depression II. Traditionally inflation has manifested itself as too many dollars (dollars are now synonymous with credit) chasing too few goods, because the Fed has relaxed credit so much that everyone with a pulse can get get a loan to buy rubber dog shit from Hong Kong. It is decidedly different now. Now, unless you are a TBTF entity, you can't get credit (money) to save your life, or your business. Thus there is no demand pushing up prices. So prices on stuff should be cheap.

But Wait! There's more! The inflation we face is caused by the TBTF entities that control the markets. For example why are gasoline prices so effin high when demand keeps falling 4-6% per year? Because prices ARE NOT GOVERNED BY SUPPLY AND DEMAND!!! Burn that into your brains! Markets (aka supply & demand) only govern prices when the markets are functional. If we allow the markets to be rigged, then we simply pay whatever we are told to. And right now, with a handful of giant oil companies and a handful of giant financial speculation companies masquerading as "banks" (Goldman, JP Morgan etc), the price is simply jacked up to maximize their profits.

So the inflation we have today is MONOPOLY or OLIGOPOLY induced inflation. The only way this is linked to the money supply, i.e; the Fed, is that the Fed provides credit to these TBTF banks that allows them to dominate the commodity markets. For example if the Fed gives Goldman $500 billion worth of credit guarantees, Goldman can effectively dominate the gold market and either drive the price up or sell gold short and force it down. It can do this without ever possessing any gold. It simply plays a game of monopoly with "fake" money listed as a credit guaranteed by the Federal Reserve (because Goldman was allowed to become a commercial bank holding company to prevent it from following Lehman brothers into a well deserved grave).

So, I think that first we need a virtual crusade against TBTF banks, oil companies, or the newest global menace the TBTF corporate farming and seed companies. If a company is too big too fail, then it ceases to be a company and should be turned into a tightly regulated public utility company like an old style water company or electric company.

Small banks are still lending to the extent they can. Big banks needs to be destroyed back to a pre-Reagan era where banks weren't allowed to cross state lines and banks weren't allowed to own insurance companies or stock brokerages or do anything but hold peoples money and make loans. We need hundreds if not thousands of small "mom and pop" style banks making loans to innovative small businesses which have provided 80% of the jobs in the past. We need oil companies broken up so they can't keep killing off start up companies trying to develop alternate fuel technology. We need corporate farm companies like Monsanto shattered into oblivion so they can't dictate the price of food--are very existence!

In short we need an old school trust buster, like Teddy Roosevelt, to begin fixing the structural problems of our economy.

[doc03]

1. From what I hear deflation the worry n/t

[Warpy]

2. Nobody thinks inflation will be a problem

especially the big money boys at the top. That's why banks and corporations are sitting on piles of cash right now, neither borrowing nor lending. In a deflationary period, the last thing you want to do is either lend or take on a lot of money that can never be repaid as the air gets let out of pumped up prices and everybody is a lot poorer in net worth numbers.

Consumers know this too, and this is another reason besides a precarious job situation that they're not spending. Why buy now when it might be cheaper later? Consumers are spendaholics in inflationary times, knowing that whatever they want will cost more in the future. They're paying down debt and saving their money now.

All this frugality will add up to causing a deflationary period even if we're not yet in one. My own feeling is that only hedge fund manipulation of the commodities markets has prevented significant deflation so far, and that manipulation has nearly run its course. Bubbles will get smaller and smaller as there is less and less money available to bleed off from small investors who jump in just a little too late.

Our system had simply become unsustainable and it's not sustainable yet. Until it is, it's going to be a bumpy economy.

[Hawkowl]

4. I agree

That is why all this "concern" with the deficit is bullshit. The main concern with deficit spending is that it will start a hyper-inflationary cycle like Wiemar Germany or Zimbabwe or Argentina. Since people seem to be avoiding spending at any cost, traditional inflation and thus deficits appear to be irrelevant.

Government is going to have to employ people directly and LEND directly to small business to get this economy going. Even with all that, as a poster referenced below, the consumption economy is in all likelihood as dead as mercantilism. Japan is a good example of an economy's predisposition to save rather than consume and the resultant decline in growth.

The obsession on growth will have to be eradicated. Who gives a flying rat's ass if the GDP is growing 5% per annum with a 12% unemployment rate? Much better to have zero growth, zero population growth, and full employment.

The RICH CARE ABOUT GROWTH BECAUSE THEY DON'T WORK! Think about it. If you get all your income from "bonds" or capital gains, you must have growth to generate an interest rate and an appreciation in stock price. This is why all we hear is growth, growth, growth, like a metastasizing cancer.

This is also why the idiot rich start wringing their hands about the deficit--because in the past it could generate inflation and that means their fixed rate bonds could become worthless very quickly. From the owner's perspective, better to have 0% inflation and a small bond return with millions of hungry peasants versus, millions of busy worker bee peasants and 5% price AND wage inflation destroying their fat bond portfolios.

[Goldstein1984]

3. The former economy was based 70% on consumption

I'm fortunate to have both an income and credit. We finally sold a house we had to leave behind when my employer went bankrupt. Guess what we did with the money? We paid off the mortgage, the home improvement loans, and the credit card bills we ran up when we relocated--zero new spending.

Are we going to buy a home in our new location? No--with things the way they are, we prefer money in the bank and mobility.
If we decide it's time to settle here, we'll build a small home. Let the big ones currently for sale stay that way.
Are we spending like we did before? No--a meal out is now a special occasion. Dining out for convenience is out.
No durable goods being purchased.
The old iPod is working just fine, as is the computer--we'll wait for compatibility problems to force another purchase.
Et cetera, et cetera...

My point is, unless the ruling class has in mind a new normal of a nation of peasants with no choice but to buy essential cheap shit at WalMart, the consumption model isn't going to bring the economy back.

We need a national program to rebuild infrastructure and employee people while doing it.

Too bad we're represented by corporatist prostitutes who belief in piss-down economics.

[Ghost Dog]

5. Yes. And of course, people preparing for deflation reinforce the trend.

On Tuesday, the Fed announced that it will reinvest the proceeds from maturing mortgage-backed securities (MBS) into US Treasuries. The process is called Quantitative Easing. In theory, Q.E. increases inflation expectations so that consumers spend more and rev up the economy. That's the theory. But adding to bank reserves when the banks are already loaded to the gills, achieves nothing. It doesn't put money in the hands of people who will spend it, generate more economic activity or increase growth. It's a big zero. Oddly enough, the Fed even admits this. According to an article in Bloomberg News, "The Central Bank posted a paper co-written by Seth Carpenter, associate director of the Fed’s monetary-affairs division, finding that the “quantity of reserve balances itself is not likely to trigger a rapid increase in lending.” No "increase in lending" means no credit expansion and no rebound. Thus, QE will have no real impact.

...

“Deflation is dangerously close,” said David Resler of Nomura Securities, one of 53 economists surveyed by the Wall Street Journal. Among economists who answered the question, nearly two-thirds said that deflation poses the bigger risk to the economy over the next three years; the remainder said inflation is the bigger threat. That compares to an April survey, when the economists were split 50/50 over whether inflation or disinflation posed the bigger risk over the next year." ("WSJ Survey: Risks of Deflation on the Rise, Fed on Hold Longer", Phil Izzo, Wall Street Journal)

The looming risk of deflation is what makes the future so "unusually uncertain". (Bernanke words) But investors don't like uncertainty, which is why they pulling their money out of equities and moving it into bonds. That's also why the flight to safety has continued for more than 2 years since the crisis began. No one knows what the policy is or what the rules are. It's catch-as-catch-can. At the same time, falling bond yields are a referendum on Bernanke's performance. Historic low yields on Treasuries indicate that the Fed has been unable to restore confidence or allay investor fears. Recent surveys of small business owners (National Federation of Independent Business) and CEO's show that confidence continues to plunge. Consumer confidence is in the dumps, too. Bottom line: No one has faith in the Fed's approach.

Bernanke hoped that restarting his bond purchasing program would convince Wall Street that he was prepared to provide as much liquidity as needed. But traders saw through the ruse. The bond market cast its ballot immediately, driving yields into the ground. Investor pessimism pushed the 10-year below 3% while 2 year Treasuries slumped to historic lows. Investors are betting that the economy is headed into another vicious cycle of debt-liquidation and depression. They don't believe the Fed can stop the freefall, so they are shifting into risk-free liquid assets.

It took the stock market a bit longer to grasp what was going on, but 24 hours later, the rout on Wall Street began. Shares plunged throughout the session pushing down the Dow Jones 265 points by the end of the day. The other indexes were battered as well. The dollar strengthened on fears of deflation while bond yields on short-term notes fell sharply. Bernanke thinks the economy can muddle through on its own, but Wall Street isn't buying it. They want more monetary stimulus, and they want it now.

/... http://www.informationclearinghouse.info/article26145.htm

It's stimulus at the grass roots that's needed. Getting spending-power into the hands of people who will spend. And actually getting some useful work done, like retooling and rebuilding for an oil-free and generally more sustainable future, for example.

[roamer65]

6. Inflation will become a problem.

From 1929-1933, the gov't was shackled by the gold standard. We are not now and we will begin to see quantitative easing (aka money creation) again very soon.

Inflationary depressions do exist, see post-WW1 Germany as a prime example.

[Hawkowl]

7. Don't see it

First, it is not merely the amount of money created, it is its velocity. Right now the velocity is only about 1. Meaning a dollar is created and it is either hoarded or used to retire debt and disappears. Second, the dollar is the worlds currency and dollars that are created are effectively funneled off shore to either safe havens, or used to purchase foreign goods. So inflation in the US is likely to remain non existent.

However, inflation of the value of the US debt held been foreigners IS likely to happen. It could be that China has to use a wheelbarrow full of US bonds to buy a loaf of bread! In fact it appears that the Chinese already know this and are planning for it buy carefully exchanging their dollars for real assets across the world such as copper mines in Australia and manufacturing plants in Brazil.

The free flow of debt (money) is vastly more intricate and more fluid in the 21st century than it was in post WWI Germany. Any additional money created by the Fed simply is disappearing.